measure of total coverage as well as unit costs of construction and maintenance which serve as measures of resource cost efficiency. On the demand side, preference costs are captured through the frequency of road accidents (accidents per km per year) and the size of state road user charges, both of which serve as indirect measures of expression of 23 preferences In the case of Germany, the nature of transfers between the state and local governments is an important determinant of the level of effort expended by each level of government. We estimate models (11) and (12) in section 2, assuming we do not observe the actual transfers for one major reason: some state governments in Germany in addition to giving transfers to the local governments for financing local roads, have also delegated the provision of state roads to these local governments. A companion paper investigates the impact of the nature of transfers on the unit costs of road provision using a number of case studies including Germany (see Humplick and Moini-Araghi, 1995).

# _Does the Level of Government Play a Role in the Outcomes with Respect to Fiscal Decentralization?_

There are significant differences between the gains and losses as a result of decentralization at the state and district levels. In Table 14, we see that the coefficients have the same sign for both state and district level impacts of decentralization on construction and maintenance costs; however, the size of the coefficients is much larger at the district level than at the state level. These results can be seen more clearly in figures 13 and 14.

With respect to maintenance, we see that, unlike the case of the cross-country and Korea data sets, unit costs of maintenance increase with increasing degrees of decentralization for both state and district governments (see figure 14). There are two possible explanations for this result. First, the effect of uniformization may be **24** dominating any efficiency gains from decentralized provision of roads . Second, it may be that when road maintenance is decentralized, lower levels of government who are closer to the voting public spend more on maintenance (or use more expensive technologies for maintenance to reduce future rehabilitation costs) than when road 25 maintenance is centralized 23 We recognize that the usefulness of the number of accidents per km per year and the size of state road user charges are not as useful indicators of preference costs as road quality. However, we were unable to obtain quality data for the level of analysis we were conducting. Since accidents and direct contributions by users to the maintenance and upgrading of roads are costs directly incurred by users, these indicators are noisy proxies for the "preference costs". The major limitation is with respect to accidents which are also dependent on driver behavior and may hence have a positive correlation with the quality of roads. **24** In Germany, because of equity concerns, road conditions are centrally regulated to be uniform in all states and districts depending on the functional classification.

25 Note that in Germany, local governments have less fiscal responsibility for maintenance (49 percent) on average compared to Korea (56 percent). Looking at figure 8, Germany is at the point just before the efficiency gains from decentralized maintenance begin to take off, while Korea is after this point, thus receiving more of the efficiency gains from decentralized maintenance.

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