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Fiscal decentralization, regional disparity, and the role of corruption

Author

Listed:
  • Nupur Nirola

    (Vellore Institute of Technology University)

  • Sohini Sahu

    (Indian Institute of Technology)

  • Atrayee Choudhury

    (Indian Institute of Technology)

Abstract

In this study, we examine how efforts taken by states to combat corruption act as a mediator in the relationship between fiscal decentralization and regional income disparities. Fiscal decentralization may affect regional disparities via access to funding, but corruption could limit the ability to efficiently transfer fiscal resources. India is one of the most decentralized nations of the world and also exhibits high regional disparities. Under this scenario, we estimate whether institutions, in the form of anti-corruption efforts by the states, interact with fiscal decentralization and affect divergence across states of India. We find that fiscal decentralization reduces the disparity across states, and the effect of fiscal decentralization is stronger under efforts to control corruption by state vigilance bodies. The results are robust across different specifications of fiscal decentralization and alternate estimation methods accounting for endogeneity. From the policy perspective, in order to harness the potential benefits of decentralization to reduce regional income disparities, governments should focus on improving the quality of institutions through control on corruption at the sub-national level.

Suggested Citation

  • Nupur Nirola & Sohini Sahu & Atrayee Choudhury, 2022. "Fiscal decentralization, regional disparity, and the role of corruption," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 68(3), pages 757-787, June.
    • Handle: RePEc:spr:anresc:v:68:y:2022:i:3:d:10.1007_s00168-021-01102-w
    DOI: 10.1007/s00168-021-01102-w
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    JEL classification:

    • 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
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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