Fiscal Decentralization, Governance, And Economic Performance: A Reconsideration

In countries with tax‐sharing systems, assigning local governments a large share of locally generated revenues is often thought to promote economic development. The more local officials benefit from local economic activity, the more supportive of business and less corrupt they should be, resulting in higher output. Some attribute China's rapid growth to its high local retention rates and Russia's 1990s stagnation to the central clawback of local revenues. I show that such arguments ignore an important actor in the game – the central government. If increasing the local tax share improves incentives for local authorities, it worsens them for central officials. The net effect on output is indeterminate.