Decentralization in Developing Economies
We develop a 2-sided principal-agent framework to think about optimal decentralization in developing economies. We can think of a benevolent government as the principal, trying to maximize social welfare, or citizens as principals, trying to get a non-benevolent government to act in their interests. In both cases, principals face information and enforcement constraints, which differ at different levels of government. After discussing the empirical evidence on patterns and causal effects of decentralization, we review the literature on these information and enforcement constraints, highlighting the most important areas in which developing countries differ from developed countries and discussing the implications for decentralization. We then consider provision of public goods by non-governmental organizations and discuss an emerging literature that examines policies which leverage potential advantages of developing economies (local information and social networks) to improve policy outcomes. We conclude by outlining promising areas for future research.
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