Decentralizing development: the economic impacts of government splits

Changes in political boundaries aimed at devolving power to local governments are common in many countries. We examine the economic impacts of the creation of smaller government units through splitting. Exploiting reforms that led to sharp increases in the number of government units in Brazil, we show that voluntary splitting enlarges the public sector, enhances public service delivery, and stimulates economic activity in new local governments over the long term. These gains in economic activity are not offset by visible losses elsewhere and are stronger in peripheral, remote, and underdeveloped areas neglected by their parent governments. Increases in fiscal revenues and decentralization of decision-making power contribute to the positive effects on local economic activity.