A comprehensive approach to understanding urban productivity effects of local governments

This paper advances our understanding of the spatial dimension of productivity by investigating the link between subnational governance arrangements and urban labour productivity. It presents a detailed study of the direct and indirect effects of decentralisation (local autonomy), government quality and fragmentation and empirically demonstrates the need for a comprehensive approach when considering the effects of governance-related characteristics on regional economic outcomes. Multi-level analysis of data for Functional Urban Areas (FUAs) in Europe during 2003-2014 suggests that labour productivity tends to be higher in regions with higher quality of government. Productivity, on average, is lower in more decentralised countries. However, under “the right” conditions (high quality of government and low fragmentation), decentralisation is positively linked to productivity. Overall, cities with high levels of government quality and local autonomy but low horizontal fragmentation tend to be the most productive.