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Fiscal Decentralization, Commitment and Regional Inequality: Evidence from State-level Cross-sectional Data for the United States

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  • Nobuo Akai

    (School of Business Administration, University of Hyogo)

  • Masayo Sakata

    (Faculty of Politics, Economic and Law, Osaka International University)

Abstract

While conventional approaches to fiscal decentralization suggest that decentralization lowers the power of redistribution among regions, recent theories argue that fiscal decentralization works as a commitment device. In this manner, where the budget in a given region is highly dependent on transfers from the central government, there is an incentive for effort following fiscal decentralization. The former effect is argued to increase regional inequality, while the latter suggests a decrease in regional inequality. However no known empirical work has directly examined the relationship between fiscal decentralization and regional inequality. In this paper, cross-sectional data for the United States, excluding the convergence of regional income, are used to derive the net relationship. It is also the case that the direction of this effect on regional inequality depends on how fiscal decentralization is promoted. While the former distribution effect directly depends on the central government's share of power, the latter incentive effect depends on autonomy. Two measures that represent the power of the central government and autonomy are used to identify these effects. The results indicate that local expenditure or revenue share in fiscal decentralization has no significant effect on regional inequality, while the achievement of autonomy by fiscal decentralization has a negative effect on regional inequality. This supports the theory that fiscal decentralization works as a commitment device. The results also show that how fiscal decentralization is promoted is important for how it impacts on regional inequality.

Suggested Citation

  • Nobuo Akai & Masayo Sakata, 2005. "Fiscal Decentralization, Commitment and Regional Inequality: Evidence from State-level Cross-sectional Data for the United States," CIRJE F-Series CIRJE-F-315, CIRJE, Faculty of Economics, University of Tokyo.
    • Handle: RePEc:tky:fseres:2005cf315
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    Cited by:

    1. Koomin Kim, 2023. "How gubernatorial budgetary power and interest groups affect vertical fiscal imbalances in the US states: Focusing on fiscal centralization and decentralization," Public Budgeting & Finance, Wiley Blackwell, vol. 43(2), pages 53-81, July.
    2. Bo, Shiyu & Deng, Liuchun & Sun, Yufeng & Wang, Boqun, 2021. "Intergovernmental communication under decentralization," Journal of Economic Behavior & Organization, Elsevier, vol. 184(C), pages 606-652.
    3. Christian Lessmann, 2012. "Regional Inequality and Decentralization: An Empirical Analysis," Environment and Planning A, , vol. 44(6), pages 1363-1388, June.
    4. Christian Lessmann, 2012. "Regional inequality and decentralization: an empirical analysis," Environment and Planning A, Pion Ltd, London, vol. 44(6), pages 1363-1388, June.
    5. Andreas P. Kyriacou & Leonel Muinelo-Gallo & Oriol Roca-Sagalés, 2015. "Fiscal decentralization and regional disparities: The importance of good governance," Papers in Regional Science, Wiley Blackwell, vol. 94(1), pages 89-107, March.
    6. Song, Yang, 2013. "Rising Chinese regional income inequality: The role of fiscal decentralization," China Economic Review, Elsevier, vol. 27(C), pages 294-309.
    7. Vu, Binh & Nguyen, Tom & Smith, Christine & Nghiem, Son, 2015. "Vietnam's responses to provincial economic disparities through central-provincial government financial relations," MPRA Paper 67705, University Library of Munich, Germany, revised 2014.
    8. Yongzheng Liu & Jorge Martinez-Vazquez & Alfred M. Wu, 2017. "Fiscal decentralization, equalization, and intra-provincial inequality in China," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(2), pages 248-281, April.
    9. Mahmoud Anber (PhD) ., 2022. "Effects of Fiscal Decentralization on Poverty Eradication in Egypt," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 6(5), pages 455-464, May.
    10. Reingewertz, Yaniv, 2014. "Fiscal Decentralization - a Survey of the Empirical Literature," MPRA Paper 59889, University Library of Munich, Germany.
    11. Christian Lessmann, 2009. "Fiscal Decentralization and Regional Disparity: Evidence from Cross-Section and Panel Data," Environment and Planning A, , vol. 41(10), pages 2455-2473, October.
    12. Carlos Usabiaga & E. Macarena Hernández-Salmerón, 2016. "Regional Growth and Convergence in Spain: Is the Decentralization Model Important?," EcoMod2016 9358, EcoMod.
    13. Diana Barros & Aurora A. C. Teixeira, 2021. "Unlocking the black box: A comprehensive meta-analysis of the main determinants of within-region income inequality," Review of Regional Research: Jahrbuch für Regionalwissenschaft, Springer;Gesellschaft für Regionalforschung (GfR), vol. 41(1), pages 55-93, February.
    14. Aleh Mazol, 2015. "Local self-governance in the Republic of Belarus," BEROC Policy Paper Series 22, Belarusian Economic Research and Outreach Center (BEROC).
    15. Nupur Nirola & Sohini Sahu & Atrayee Choudhury, 2022. "Fiscal decentralization, regional disparity, and the role of corruption," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 68(3), pages 757-787, June.
    16. Mr. Ehtisham Ahmad & Mr. Giorgio Brosio & Mr. Vito Tanzi, 2008. "Local Service Provision in Selected OECD Countries: Do Decentralized Operations Work Better?," IMF Working Papers 2008/067, International Monetary Fund.

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    More about this item

    JEL classification:

    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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