Theories of fiscal competition between jurisdictions suggest that investment in productive relative to consumptive spending is higher in a decentralised setting, and that efficiency of the public sector is also higher. This paper empirically analyses the link between decentralisation and the composition of public spending as well as the relation between decentralisation and educational performance. The results suggest that fiscal decentralisation increases the share of public funds directed to capital spending and that the bulk of this shift is due to higher education spending. Using an education production function approach and PISA results (Programme of International Student Assessment) as an indicator of educational output, the results suggest that educational performance is significantly higher in decentralised countries, even when controlling for spending and other variables affecting education. A 10% point increase in decentralisation increases educational performance by four PISA points, thereby improving the PISA ranking by around four country positions on average. Decentralisation to lower government levels and decentralisation to the school level (school autonomy) have a similar impact on educational performance.
