Does Fiscal Decentralization Promote Fiscal Discipline?

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Akin Z., Bulut-Cevik Z. B., NEYAPTI Ş. B.

EMERGING MARKETS FINANCE AND TRADE, vol.52, no.3, pp.690-705, 2016 (SSCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 52 Issue: 3
  • Publication Date: 2016
  • Doi Number: 10.1080/1540496x.2015.1012920
  • Journal Name: EMERGING MARKETS FINANCE AND TRADE
  • Journal Indexes: Social Sciences Citation Index (SSCI), Scopus
  • Page Numbers: pp.690-705
  • Keywords: fiscal decentralization, fiscal discipline, redistribution, CENTRAL BANK INDEPENDENCE, ECONOMIC-GROWTH, CROSS-COUNTRY, TAX RATES, INCOME, FEDERALISM, INFLATION, AGGREGATE
  • Middle East Technical University Affiliated: Yes

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