The impact of functional decentralization and externalization on local government transparency

•This paper considers the creation of different functional decentralized entities.•The use of panel data methods provides more robust results than cross-sectional studies.•Findings show more transparent municipalities have higher levels of functional decentralization.•Findings show the introduction of the private sector does not affect public transparency.

Local governments are increasingly establishing functional decentralized agencies, such as autonomous organizations, public companies, foundations and public business entities to provide public services. Furthermore, they are also introducing the private sector, contracting out public services to a private company and creating mixed companies. Our aim is to analyze the effect of functional decentralization and externalization (outsourcing or contracting out) processes on public transparency levels, since theoretically, they are aimed toward good governance and accountability. To do so, we use a sample composed of the 110 largest Spanish cities for the period 2008–2010. The results show that decentralized agencies, especially public companies and foundations, impact positively on levels of public transparency. However, there is no evidence that suggests that the introduction of the private sector, using outsourcing and mixed companies, affects the transparency of local governments.