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September 1996 Generally, local maintenance of roads is more efficient than centrally controlled maintenance. For road construction, contracting procedures and competitive bidding are more important than issues of decentralization. Central governments should regulate safety and other network externalities. Humplick and Moini-Araghi empirically investigate how decentralization affects the efficiency of road provision from the viewpoint of the local goods provider and the road user. The theoretical model: a double-cost hidden level of effort. For accurate estimates, they found it important to include both user and provider concerns in determining the optimal level of decentralization. Using four different model specifications and three data sets, they find that 100-percent decentralization of maintenance functions (where there is no central regulation on quality standards) produces the most efficiency gains, as quality roads are provided at lower unit costs. There is little justification for central government to be involved in road maintenance. In fact, as Germany's example shows, uniform standards combined with decentralized maintenance remove the incentive to reduce costs and erode most of the efficiency gains from local maintenance. Maintenance is by definition a local activity and should reflect user preferences. Central governments should regulate safety and other network externalities by having a stake in the financing of road administration and in such functions as planning, policy setting, and regulation of safety and other network externalities. Central governments should finance no more than 10 percent of administrative costs. As for construction, it depends on the country. It may be better to ensure that contracting procedures in a country are efficient before suggesting the decentralized provision of roads. It is easier for local governments than for central governments to incorporate user preferences in their spending decisions. Similarly, determining where to make investments, deciding how to procure works, and monitoring the quality of construction and maintenance is often done more efficiently locally - except when local capacity to carry out road works is limited. The results point to the benefits of decentralized provision of roads, but many countries contract out maintenance and provision. In that case, it may not matter whether local competitive bidding is carried out by a central or local agency. This paper - a product of the Environment, Infrastructure, and Agriculture Division, Policy Research Department - is part of a larger study in the Agriculture and Natural Resources Department to develop a strategy for rural development. The study is funded jointly by the Norwegian and Swiss Special Studies Trust Funds and by the Bank's Research Support Budget, under research project Decentralization, Fiscal Systems, and Rural Development (RPO 679-68).
Generally, local maintena ...
October 1996 The findings suggest that across very different financial systems, financial markets and intermediaries have a comparative advantage in funding short-term investment. An active, though not necessarily large, stock market and high scores on an index of respect for legal norms are associated with faster than predicted rates of firm growth. Government subsidies to industry do not increase the proportion of firms growing faster than predicted. Demirgüç-Kunt and Maksimovic focus on two issues. First, they examine whether firms in different countries finance long-term and short-term investment similarly. Second, they investigate whether differences in financial systems and legal institutions across countries are reflected in the ability of firms to grow faster than they might have by relying on their internal resources or short-term borrowing. Across their sample, they find: * Positive correlations between investment in plant and equipment and retained earnings. * Negative correlations between investment in plant and equipment and external financing. * Negative correlations between investment in short-term assets and retained earnings. * Positive correlations between investment in short-term assets and external financing. These findings suggest that across very different financial systems, financial markets and intermediaries have a comparative advantage in funding short-term investment. For each firm in their sample, they estimate a predicted rate at which it can grow if it does not rely on long-term external financing. They show that the proportion of firms that grow faster than the predicted rate in each country is associated with specific features of the legal system, financial markets, and institutions. An active, though not necessarily large, stock market and high scores on an index of respect for legal norms are associated with faster than predicted rates of firm growth. They present evidence that the law-and-order index measures the ability of creditors and debtors to enter into long-term contracts. Government subsidies to industry do not increase the proportion of firms growing faster than predicted. This paper - a product of the Finance and Private Sector Development Division, Policy Research Department - is part of a larger effort in the department to understand the impact of financial constraints on firm growth.