Natural resources, decentralization, and risk sharing: can resource booms unify nations?

Working paper

Previous studies imply that a positive regional fiscal shock, such as a resource boom, strengthens the desire for separation. In this paper we present a new and opposite perspective. We construct a model of endogenous fiscal decentralization that builds on two key notions: a trade-off between risk sharing and heterogeneity, and a positive association between resource booms and risk. The model shows that a resource windfall causes the nation to centralize as a mechanism to either share risk and/or prevent local capture, depending on the relative bargaining power of the central and regional governments. We provide cross country empirical evidence for the main hypotheses, finding that resource booms: (i) decrease the level of fiscal decentralization with no U-shaped patterns, (ii) cause the former due to risk sharing incentives primarily when regional governments are relatively strong, and (iii) have no effect on political decentralization.

Authors: Perez-Sebastian, F; Raveh, O

• Publication status: Published
• Publisher: University of Oxford
• Series: OxCarre Papers
• Publication date: 2015-07-15
• Paper number: 142
• Keywords: natural resources; bargaining power; decentralization; secession; risk sharing