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Fiscal efficiency, redistribution and welfare

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  • Neyapti, Bilin
  • Bulut-Cevik, Zeynep Burcu

Abstract

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.

Suggested Citation

  • Neyapti, Bilin & Bulut-Cevik, Zeynep Burcu, 2014. "Fiscal efficiency, redistribution and welfare," Economic Modelling, Elsevier, vol. 41(C), pages 375-382.
    • Handle: RePEc:eee:ecmode:v:41:y:2014:i:c:p:375-382
    DOI: 10.1016/j.econmod.2014.05.034
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    3. Alejandro U. Becerra-Ornelas & Hector M. Nuñez, 2019. "The technical efficiency of local economies in Mexico: a failure of decentralized public spending," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 62(2), pages 247-264, April.
    4. Yung‐ho Chiu & Kuei‐Ying Huang & Tai‐Yu Lin & Tzu‐Han Chang, 2022. "Government debt and fiscal execution efficiency," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(1), pages 111-128, January.
    5. Janina Kotlinska & Joanna Nucinska & Jacek Bednarz, 2021. "Education Financing: Explaining the Expenditure Concentration Gap between the State and Local Governments in Poland 2008-2019," European Research Studies Journal, European Research Studies Journal, vol. 0(2), pages 564-578.
    6. Yang, Zhou, 2016. "Tax reform, fiscal decentralization, and regional economic growth: New evidence from China," Economic Modelling, Elsevier, vol. 59(C), pages 520-528.

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