Fiscal Decentralization in Developing Countries: The Effects of Local Corruption and Tax Evasion
A movement toward fiscal decentralization is underway in many countries across the world. This movement is partly justified by appeal to the classic argument of Tiebout (1956), who claimed that decentralized provision of public goods allows better fulfillment of diverse individual demands. Many commentators, however, have expressed concern that the conditions justifying Tiebout's argument are not present in many developing countries. This paper analyzes the consequences of altering Tiebout's model to include local corruption and tax evasion, which may exist in many developing countries. The analysis shows that these forces indeed limit the benefits from fiscal decentralization. By raising public-good costs, corruption cancels some of the gains from better demand fulfillment, which arise as Tiebout sorting generates homogeneous local jurisdictions. By creating incentives for mixing, thereby preventing formation of homogeneous communities, tax evasion may block the operation of the Tiebout mechanism, eliminating the gains from fiscal decentralization.
|Date of creation:||May 1999|
|Date of revision:||Apr 2000|
|Publication status:||Published in Annals of Economics and Finance, May 2000, pages 1-18|
|Contact details of provider:|| Web page: http://cema.cufe.edu.cn/|
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416-416.
- Xie, Danyang & Zou, Heng-fu & Davoodi, Hamid, 1999.
"Fiscal Decentralization and Economic Growth in the United States,"
Journal of Urban Economics,
Elsevier, vol. 45(2), pages 228-239, March.
- Danyang Xie & Heng-fu Zou & Hamid Davoodi, 1999. "Fiscal Decentralization and Economic Growth in the United States," CEMA Working Papers 109, China Economics and Management Academy, Central University of Finance and Economics.
- Brueckner, Jan K, 1999. " Fiscal Federalism and Capital Accumulation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 1(2), pages 205-224.
- Oates, Wallace E., 1993. "Fiscal Decentralization and Economic Development," National Tax Journal, National Tax Association, vol. 46(2), pages 237-43, June.
- Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
- Oates, Wallace E., 1993. "Fiscal Decentralization and Economic Development," National Tax Journal, National Tax Association, vol. 46(2), pages 237-243, June.
- Zhang, Tao & Zou, Heng-fu, 1998. "Fiscal decentralization, public spending, and economic growth in China," Journal of Public Economics, Elsevier, vol. 67(2), pages 221-240, February.
- Tao Zhang & Heng-fu Zou, 1996. "Fiscal decentralization, public spending, and economic growth in China," Policy Research Working Paper Series 1608, The World Bank.
- Tao Zhang & Heng-fu Zou, 2001. "Fiscal decentralization, public spending, and economic growth in China," CEMA Working Papers 58, China Economics and Management Academy, Central University of Finance and Economics.
When requesting a correction, please mention this item's handle: RePEc:cuf:wpaper:1. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Qiang Gao)
If references are entirely missing, you can add them using this form.