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Debates on the appropriate role of the state and appropriate policies and institutions to
further this role are typically carried out by relying upon anecdotal evidence in the absence
of a quantifiable definition of "good government." This paper attempts to fill this void by
developing a gauge of the quality of government through the construction of an index of
governance quality for a sample of eighty countries. This index is offered as a starting
point for an objective assessment of various economic policies to further the quality of
governance rather than as a precise and definitive indicator of governance quality. After
describing the construction of the index and the results, we provide an application to the
debate on the appropriate level of decentralization of fiscal powers.
This application provides empirical support for the theoretical underpinnings of the fiscal
federalism literature. Governance quality is enhanced, according to this theory, by more
closely matching services with citizen preferences, and by moving governments closer to
the people they are intended to serve, which ensures greater accountability of the public