Does fiscal decentralization affect the effectiveness of intergovernmental grants? European regional policy and Spanish autonomous regions

We suspect that the efficiency of intergovernmental grants is related to the level of fiscal autonomy of the subsidized government. In this paper we construct and estimate a panel data model capturing the role of fiscal federalism on the effectiveness of EU structural actions in enhancing public investment. We use data from the 17 Spanish regions for the period 1993-2007. Results unambiguously support the hypothesis that the effectiveness of the structural funds decreases with larger fiscal autonomy, which could reflect the fact that fiscal decentralization in Spain has been focused to larger taxation autonomy without affecting regional income redistribution.