The Korea Local Administration Review

The purpose of present research was to evaluate the effectiveness of fiscal decentralization on regional economic development in Korea. With using a panel dataset for the 16 regions of Korea excluding Sejong City during the period from 2007 to 2017, the statistical modeling framework most closely aligned with the postulated causal process, and supportable with available data, was a two-stage least squares regression model with instrumental variables. In theory, use of the three instruments provided a means of solving the potential problem of the endogeneity of fiscal decentralization with regional economic development. This research discovered that the potential drivers behind fiscal decentralization were the percentage of total amount supported from Federal outlays to specific regional government and the local tax revenue sharing, as well as previous expenditure of local governments. The empirical result from this study has shown that the fiscal decentralization with assuming of endogeneity issues did not have any relationship with developing of regional economic. This result is not also consistent with the hypothesis formulated earlier by Oates(1972). Lastly, policy implications were discussed based on different circumstances of local government in Korea.

□ Keywords: Fiscal Decentralization, Regional Economic, Instrumental Variables, Endogeneity