Analyzing the Effects of Fiscal Decentralization on Attracting Private Investment in Provinces of Iran

In the economic literature, financial decentralization theories have been considered as a tool for increasing efficiency and productivity of public sector and promoting balanced regional growth and development. This increase in regional efficiency and growth could lead to attraction of private investment and provide a ground for endogenous and sustainable development in local areas. Therefore, the main objective of this study is to investigate the effect of revenue and expenditure decentralization on private sector investment in Iran Provinces during 2005-2016 using Generalized Method of Moments method. The results confirm the nonlinear relation between indicators of financial decentralization and private investment. This relationship for revenue decentralization is U-shaped (due to inequality distribution of income sources and unbalanced growth in some provinces), and for expenditure decentralization is inverted-U shaped (due to reduction in final benefit from public infrastructure expenditures). In addition, relationship between inflation, real production of each worker, urbanization rate, and research and development expenditures with private investment are positive and significant.