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Fiscal efficiency, redistribution and welfare

Listed author(s):
  • Neyapti, Bilin
  • Bulut-Cevik, Zeynep Burcu

The expanding literature on fiscal decentralization (FD) emphasizes the role of institutional mechanisms for FD's welfare effects. We analyze the welfare effects of FD in case of a fiscal transfer mechanism that punishes inefficiency in tax collection and compensates for local income deficiency. In addition, a portion of transfers is earmarked for investment. Given a level of FD and these rules, the representative local government chooses its tax collection effort to maximize local utility. The solution of the model reveals that the stricter the redistributive rule, the higher are steady-state fiscal efficiency and welfare. While the effectiveness of the redistributive parameters increases with centralization of the revenue pool, it decreases with the tax rate. Both welfare and income distribution, on the other hand, improve with the degree of revenue centralization and the tax rate. Besides, fiscal efficiency and redistribution decrease with investment-earmarked transfers.

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File URL: http://www.sciencedirect.com/science/article/pii/S0264999314002132
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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 41 (2014)
Issue (Month): C ()
Pages: 375-382

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Handle: RePEc:eee:ecmode:v:41:y:2014:i:c:p:375-382
DOI: 10.1016/j.econmod.2014.05.034
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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