increases the informational advantage of fiscal decentralization.<sup>2</sup> To a large extent, similar incentives and disciplining mechanisms are at work in a parliamentary democracy where the indirectly elected (or parliament appointed) executive can be removed from the office by a noconfidence vote by the legislature.<sup>3</sup> Depending on the degree to which these two forms of government are associated with more exclusive consideration of local interests, the misalignment of local political incentives with national interests may also become an important factor in the nexus between fiscal decentralization and political systems. In this regard, strong national parties may help align political incentives of local politicians with national objectives by affecting career concerns of local politicians (Riker, 1964).<sup>4</sup> Local politicians may have the incentive to internalize the externalities of their policies aiming to benefit citizens in their jurisdiction (i.e. start taking into consideration the preferences of the populations in other jurisdictions) in the hope of getting recognition, promotion, and political support from their national party which, in principle, cares about national level performance.

The evidence on the preferred political institution to complement fiscal decentralization is rather mixed.<sup>5</sup> A fundamental challenge for the empirical literature has been to establish a more robust causal link between political institutions and fiscal or service delivery outcomes, given the reliance on cross-country time-series data, the prevalence of endogeneity, and likely unobserved country differences explaining public sector behavior and outcomes (e.g., Persson and Tabellini, 2004b). However, two papers are directly relevant to the objectives of this study. The first is Baqir (2002), who compares public spending in U.S. municipalities differing in their form of government. In some US municipalities the mayor is directly elected (presidentialism), whereas in others the chief executive is indirectly elected (i.e., appointed by the municipal council) as in parliamentarism. Baqir finds that the prediction of Persson et al. (2000) about the size of government spending being lower in a presidential regime is confirmed by the fact that government spending is lower in the municipalities where the mayor is directly elected compared to the municipalities where the mayor

> 2 Recently, however, the literature has also noted that the advantage of decentralizing delivery mechanisms to directly elected local authorities may be undermined by greater elite capture (Bardhan and Mookherjee, 2000, Ahmad, et al., 2005; Devarajan, et al., 2009).

> 3 Persson, Roland, and Tabellini (2000), predict that presidential regimes have lower spending and taxation than parliamentary regimes for reasons related to the absence of risk of no-confidence vote and the separation of powers under a presidential regime. In addition, they predict that presidential regimes should be associated with more targeted programs at the expense of broad spending programs.

> 4 An alternative system is administrative subordination, whereby central authorities appoint local governments rather than having them being elected (Riker, 1964; Blanchard and Shleifer, 2001; Martinez-Bravo, 2013). Enikolopov and Zhuravskaya (2007), confirm Riker’s hypothesis that appointing local politicians rather than electing them does not improve the results of fiscal decentralization.

> 5 For a recent survey of the literature of decentralization and local participation see Mansuri and Rao (2012).

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