Does Local Autonomy Increase Local Income? Evidence from Italy

Can fiscal autonomy affect per capita income levels? The existing literature shows mixed results on the impact of fiscal autonomy on gross domestic product growth; it often uses crosscountry datasets comparing nations with different socioeconomic contexts. Even when the literature delves into the subnational entities of a nation, either financial indices or institutional dummies are used as proxies for fiscal autonomy; both can entail endogeneity due to either measurement errors or reverse causality. We empirically investigate the impact of fiscal autonomy on per capita income stimulated by the proper use of local financial resources. We do this by exploiting an Italian natural experiment, examining the impact on per capita income of the use of own resources in the municipalities of the Autonomous Province of Trento and the Autonomous Province of Bolzano, which manage almost all their taxes autonomously, compared with the neighbouring regions of Veneto and Lombardy, which manage only a small fraction of the taxes paid by their citizens. We use a spatial fuzzy regression discontinuity design to compare similar municipalities on the border between the pairs of provinces and Lombardy and Veneto. We find that the higher the level of local financial fiscal autonomy, proxied by the ratio of own tax revenue to total revenue, the higher the level of per capita income. The proxy is instrumented using a dummy variable indicating municipalities with institutional fiscal autonomy: those belonging to the provinces of Trento and Bolzano. This allows us to interpret the proxy as an exogenous variation due to institutional fiscal autonomy. We find that a 1-percentage-point increase in financial fiscal autonomy results in a 0.2–0.7% increase in per capita income. This result seems to be driven by a higher level of employment in the private sector, which is benefiting from the favourable business environment provided by the local governments.