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This is an electronic version of anArticle published in the Journal of public economics, 88 (3-4), pp. 867 -893 © 2004 Elsevier Science B.V. http://www.elsevier.com/locate/jpube Abstract Bolivia's recent decentralization involved the creation of hundreds of new municipalities, devolution of substantial resources from central agencies to local governments, and the development of innovative institutions of local governance. Detailed study of investment sector-by-sector shows that objective indicators of need are the most important determinants of the changes in investment patterns that ensued throughout the country. November 2000 6 Sabaya, Oruro, population 2,074. 7 Chimoré, Cochabamba, site of major highway works, and Ascención de Guarayos, Santa Cruz.

The effects of decentralization on public sector outputs is much debated but little agreed upon. This paper compares the remarkable case of Bolivia with the more complex case of Colombia to explore decentralization's effects on public education outcomes. In Colombia, decentralization of education finance improved enrollment rates in public schools. In Bolivia, decentralization made government more responsive by re-directing public investment to areas of greatest need. In both countries, investment shifted from infrastructure to primary social services. In both, it was the behavior of smaller, poorer, more rural municipalities that drove these changes. A key innovation of this paper is a methodology for estimating the effects of decentralization in a data-poor environment.

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