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Does fiscal decentralization mitigate the adverse effects of corruption on public deficits?

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  • Oto-Peralías, Daniel
  • Romero-Ávila, Diego
  • Usabiaga, Carlos

Abstract

Corruption is harmful for public finances and appears closely related to fiscal deficits. We open a new avenue in addressing the effects of corruption on public deficits through fiscal decentralization. For a sample of 31 OECD countries over the period 1986–2010, we find that fiscal decentralization contributes to mitigating the adverse effects of corruption on public deficits. In addition, our findings indicate diversity in the effects of fiscal decentralization, in that it appears related to lower deficits in countries with higher levels of corruption but not in less corrupt countries. Our results suggest that bringing the government closer to the people through fiscal decentralization in relatively corrupt countries leads to more responsible fiscal management.

Suggested Citation

  • Oto-Peralías, Daniel & Romero-Ávila, Diego & Usabiaga, Carlos, 2013. "Does fiscal decentralization mitigate the adverse effects of corruption on public deficits?," European Journal of Political Economy, Elsevier, vol. 32(C), pages 205-231.
    • Handle: RePEc:eee:poleco:v:32:y:2013:i:c:p:205-231
    DOI: 10.1016/j.ejpoleco.2013.07.005
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    More about this item

    Keywords

    Corruption; Public deficit; Fiscal decentralization; OECD;
    All these keywords.

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • 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

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