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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.

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Bibliographic Info

Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-315.

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Length: 29 pages
Date of creation: Jan 2005
Date of revision:
Handle: RePEc:tky:fseres:2005cf315

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  1. Yingyi Qian & Barry R. Weingast, 1997. "Federalism as a Commitment to Preserving Market Incentives," Working Papers 97042, Stanford University, Department of Economics.
  2. Dapeng Hu & Masahisa Fujita, 2001. "Regional disparity in China 1985-1994: The effects of globalization and economic liberalization," The Annals of Regional Science, Springer, vol. 35(1), pages 3-37.
  3. Robert G. Lynch, 2003. "Estimates of Income and Income Inequality in the United States and in Each of the Fifty States: 1988-1999," Journal of Regional Science, Wiley Blackwell, vol. 43(3), pages 571-588.
  4. Richard Morrill, 2000. "Geographic variation in change in income inequality among US states, 1970-1990," The Annals of Regional Science, Springer, vol. 34(1), pages 109-130.
  5. Oates, Wallace E., 1993. "Fiscal Decentralization and Economic Development," National Tax Journal, National Tax Association, vol. 46(2), pages 237-43, June.
  6. Akai, Nobuo & Sakata, Masayo, 2002. "Fiscal decentralization contributes to economic growth: evidence from state-level cross-section data for the United States," Journal of Urban Economics, Elsevier, vol. 52(1), pages 93-108, July.
  7. Mark S. McGillivray & Matthew Peter, 1991. "Regional Income Inequality In A Developed Nation: A Cross-Sectional Study Of Australian Sub-State Regions," The Review of Regional Studies, Southern Regional Science Association, vol. 21(2), pages 137-151, Summer.
  8. Partridge, Mark D. & Rickman, Dan S. & Levernier, William, 1996. "Trends in U.S. income inequality: Evidence from a panel of states," The Quarterly Review of Economics and Finance, Elsevier, vol. 36(1), pages 17-37.
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Cited by:
  1. Christian Lessmann, 2011. "Regional Inequality and Decentralization - An Empirical Analysis," CESifo Working Paper Series 3568, CESifo Group Munich.
  2. Leonel Muinelo-Gallo & Andreas P. Kyriacou & Oriol Roca-Sagalés, 2013. "Fiscal decentralization and regional disparities: the importance of good governance," Documentos de Trabajo (working papers) 13-03, Instituto de Economia - IECON.
  3. Christian Lessmann, 2009. "Fiscal decentralization and regional disparity: evidence from cross-section and panel data," Environment and Planning A, Pion Ltd, London, vol. 41(10), pages 2455-2473, October.
  4. Ehtisham Ahmad & Giorgio Brosio & Vito Tanzi, 2008. "Local Service Provision in Selected Oecd Countries," IMF Working Papers 08/67, International Monetary Fund.

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