Several arguments derived from fiscal federalism theory suggest that decentralization may improve the provision of public goods and services. However, theory remains inconclusive regarding these effects under partial decentralization. The aim of this study is to examine this hypothesis by evaluating the effects on educational outcomes of the partial fiscal decentralization reform that took place in Spain during the 1980s. Since education competences were devolved to the regions at different points in time, we can consistently estimate the effects of this reform by applying the differences-in-differences method and by using the non-decentralized regions as the comparison group. We find that the reform had a sizeable impact on the percentage of students dropping out early from school. The effects are much stronger for regions with a high level of revenues. We also find that the effects are concentrated in the high-school program and that the reform was not able to improve educational outcomes in the vocational program. We interpret these results as evidence that decentralization improved the match between education policy and population preferences.
