Does Fiscal Decentralization Promote Fiscal Discipline?

Date

2016-03-01

Author

Akin, Zafer
Bulut-Cevik, Zeynep B.
NEYAPTI, ŞEN BİLİN

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This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

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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 sector's utility weight enhances the disciplinary effect of decentralization.

Subject Keywords

Fiscal decentralization, Fiscal discipline, Redistribution

URI

https://hdl.handle.net/11511/66846

Collections

Department of Economics, Article