Does fiscal decentralization promote fiscal discipline?
Date
2016Source Title
Emerging Markets Finance and Trade
Print ISSN
1540-496X
Electronic ISSN
1558-0938
Publisher
Routledge
Volume
52
Issue
3
Pages
690 - 705
Language
English
Type
ArticleItem Usage Stats
194
views
views
372
downloads
downloads
Abstract
We investigate the efficiency and equity implications of a redistributive rule that takes into account both local tax collection efforts and deviation of local incomes from respective targets under alternative fiscal mechanisms. We show that, if the general budget constraint is binding, the proposed transfer rule leads to higher fiscal discipline under fiscal decentralization (FD) than under centralized redistribution. Although the centralized decision yields better income distribution than FD, FD also improves income distribution unambiguously when equalization across regions is targeted explicitly. When localities act strategically, the private sectors utility weight enhances the disciplinary effect of decentralization. © 2016 Taylor & Francis Group, LLC.