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Does Fiscal Decentralization Promote Fiscal Discipline?

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  • Bilin Neyapti
  • Nida Cakir

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.
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Suggested Citation

  • Bilin Neyapti & Nida Cakir, 2007. "Does Fiscal Decentralization Promote Fiscal Discipline?," Working Papers 0708, Department of Economics, Bilkent University.
    • Handle: RePEc:bil:wpaper:0708
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    File URL: http://www.bilkent.edu.tr/~economics/papers/07-08%20DP_BilinNeyapti.pdf
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    Cited by:

    1. Neyapti, Bilin, 2013. "Fiscal decentralization, fiscal rules and fiscal discipline," Economics Letters, Elsevier, vol. 121(3), pages 528-532.
    2. Neyapti, Bilin & Bulut-Cevik, Zeynep Burcu, 2014. "Fiscal efficiency, redistribution and welfare," Economic Modelling, Elsevier, vol. 41(C), pages 375-382.
    3. Ernesto Crivelli, 2012. "Local Governments’ Fiscal Balance, Privatization, and Banking Sector Reform in Transition Countries," IMF Working Papers 2012/146, International Monetary Fund.
    4. Zeynep Burcu BULUT-ÇEVİK, 2020. "Fiscal Decentralization with a Redistribution Rule vs. Fiscal Centralization," Sosyoekonomi Journal, Sosyoekonomi Society, issue 28(44).
    5. Neyapti, Bilin & Özdemir Oluk, Begüm, 2021. "Fiscal transfers in Turkey: Do politics matter?," Economic Systems, Elsevier, vol. 45(3).

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