This study analyzes the links between efficiency and the decentralization of power in Spanish local governments for the years 1995 and 2000. To this end, we carried out a two-stage activity analysis in which the performance of each municipality was first evaluated against other municipalities with a similar level of power and, in a second stage, compared with that of other municipalities for which decentralization remained at a more preliminary stage. Results suggest that some municipalities could manage their resources more efficiently if they were granted more power. Although these sort of decentralized economies do not emerge for all municipalities, their magnitude clearly overshadows the diseconomies found if downscaling of decision making goes too far and least decentralized municipalities dominate. In addition, the likely efficiency gains from enhanced decentralization increase over time. © 2009 Springer-Verlag.