As a child growing up in Italy, Nicola Bianchi remembers the major decentralization reform passed in 1993. The reform changed how public services were funded by replacing tax grants from the central government with revenues from a new local property tax. The goal was to increase the financial independence of the country’s local municipalities.
Years later, as Bianchi pursued his Ph.D. in economics, he started wondering what economists knew about the impacts of this type of reform. He learned that while researchers have devoted plenty of time to studying fiscal decentralization, they have tended to focus on how it impacts the functioning of governments themselves—for instance, by shifting their spending or altering corruption levels.
Bianchi, now an assistant professor of strategy at Kellogg, was curious about a different implication: How might average citizens be affected by these reforms? “My thought was, if the decentralization reform changed how municipalities spent on local services, then some of those services might have broader consequences on the lives and choices of residents,” he says.
In a new paper, Bianchi and coauthors Michela Giorcelli, at UCLA, and Enrica Maria Martino, at the Ministero dell’Economia e delle Finanze in Italy, investigated those consequences. Drawing from decades of balance sheets from Italy’s eight thousand municipalities, as well as Census data, Social Security databases, and even records of Allied bombings during World War II, they analyzed how the decentralization reform in Italy altered the functioning of local governments—and, in turn, how these shifts in local governance affected the lives of residents.
The researchers found that, overall, municipalities’ spending and revenues actually went down after the reform took effect, while access to services increased—an indication of improved efficiency. Much of this efficiency seemed to come from cutting down on money spent on internal administration and routing it instead to public-facing services like government-subsidized nursery schools and retirement homes.
To understand how the reform affected local residents, the researchers zoomed in on the funding dedicated to government-subsidized nursery schools. They chose this as a lens because of how directly nursery schools affected the lives and choices of local families—especially mothers.
Importantly, municipalities differed in terms of how decentralized they became after the reform. Bianchi and his colleagues found that more decentralized municipalities—those that generated more revenue from the new local property tax—funneled a larger share of their budgets to nursery schools than otherwise similar municipalities that were not as decentralized. Accordingly, women’s participation in the labor force in these places jumped by as much as 20 percent.
Bianchi says their findings demonstrate the very tangible effects on people’s lives that can come from increasing a local government’s level of efficiency and accountability.
The Difference Made by WWII Bombings
Because of the way Italy’s reform worked, different municipalities experienced different levels of decentralization depending on how much money they were able to raise via the new property tax.
The researchers faced a challenge, then. How could they pinpoint the effects of decentralization on the labor market, as opposed to other factors that might have been at play, such as how developed the local economy was?
The researchers landed on an unlikely differentiating factor: the locations of Allied bombings in Italy during World War II. Municipalities with a significant number of buildings destroyed during the war had newer buildings when the 1993 reform was implemented than did non-bombed locations. This was key, because the value used to determine the property tax rate is not the market value, but a bureaucratic value assigned at the time of construction that’s used only for tax purposes. (When assigned, this bureaucratic value is close to market value, but they lose that connection over time.) Under this system, newer buildings tend to have a higher property tax value.
This meant that the previously bombed municipalities were able to earn more revenue via the new local property tax than otherwise similar municipalities that hadn’t been bombed, because their buildings had a higher bureaucratic assessment 48 years later—and thus experienced a more profound degree of fiscal decentralization under the new reform.
“In contexts without easy access to affordable childcare, many women are still constrained in their choice to participate in the workforce.”
— Nicola Bianchi
Once they arrived at this solution, the researchers had another challenge on their hands. The allied bombings were, of course, not random. There were likely economic factors that went into choosing bombing targets that could muddy the team’s data decades later.
So they exploited the fact that bombings were very imprecise. Instead of using the cities that were targeted for bombings in their study, they focused on adjacent municipalities that were bombed by mistake. The researchers then compared those accidentally bombed locations with comparable municipalities that were adjacent to non-targeted areas, and were thus left unscathed.
The researchers then drilled down into the data in terms of the impact on residents’ lives.
First, they discovered that higher levels of decentralization led to less government waste and more access to local public services in those municipalities, even after controlling for other factors such as population and geography. Though their overall spending decreased compared with less decentralized municipalities, bombing-affected municipalities devoted 1.2 percent more of their spending to local services than non-bombed municipalities; they were 7.4 percent more likely to have programs for local economic development; and they were 5.4 percent more likely to have at least one public nursery school.
Next, they looked specifically at the impact on women’s labor. While rates of women’s labor were consistent between bombed and non-bombed areas prior to the 1993 reform, those numbers started to diverge after 1993. By 2001, there were 3.4 percent more women working in bomb-affected areas. By 2011 that number was up to 5.1 percent, and when the researchers looked specifically at municipalities with a higher share of young parents, the number jumped to close to 20 percent.
Importantly, the researchers did not see a jump in labor participation overall after the reform. In places that had been bombed, labor participation jumped only among women. Digging deeper into the Italian Social Security data offered evidence that funding for nursery schools explained this trend: for example, the labor-market increase was concentrated among women under 35, those most likely to have young children.
Bianchi explains that the overall move toward providing more services was driven by the fact that in bomb-affected towns, residents directly funded a larger share of municipal spending. This meant they were more aware of the value of what they were getting for their money and were more likely to spot bad public management of tax dollars. The upshot: administrators had more incentive to improve public services.
“The idea is, now that residents are paying directly for the local government and for the local public services,” Bianchi says, “these local administrators are pushed to provide more for the residents in order to keep them happy.”
Supporting this interpretation was the finding that towns with higher political competition—as measured by mayor turnover—were associated with more local services and a greater jump in female employment after the tax reform.
The Choice to Work
Bianchi says that his research is another piece of evidence pointing to the crucial importance of affordable childcare.
“In contexts without easy access to affordable childcare, many women are still constrained in their choice to participate in the workforce,” he says.
Bianchi hopes his research can help illustrate what better governance systems could look like.
“This paper highlights a new lever that can be used to improve the functioning of labor markets and increase labor participation of women,” Bianchi says. “In the past, we have tended to focus on actions that the government might take on the labor markets themselves. This paper is saying, maybe there’s another dimension that you can leverage to improve things: make sure that local governments are functioning better, because if they provide better services, that might have some indirect consequences on the labor choices of women.”
Katie Gilbert is a freelance writer in Philadelphia.
Bianchi, Nicola, Michela Giorcelli, and Enrica Maria Martino. 2022 “The Effects of Fiscal Decentralization on Publicly Provided Services and Labor Markets.” Working paper.