The allocation of responsibilities between central and local governments and their fiscal relationship is one of the most important and complex issues of public finance. The general tendency around the world in the last decade has been toward more decentralization, that is delegation of more fiscal prerogatives to local governments even in countries that, traditionally, have been rather centralized. This tendency has as a primary motivation, the desire for local governments to be "closer to the people" and, therefore have better information on how to choose policies that fit the local needs. Whether this process has been a success remains to be seen. This working paper focuses on four issues: (i) the rules of allocation of fiscal resources to different localities; (ii) the rules concerning how localities can spend fiscal transfers from the center; (iii) the rules concerning the balance of local governments' budgets; and (iv) issues concerning incentives for local politicians.
