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Revenue Decentralization and Vertical Fiscal Imbalance: A Survey

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  • Manuel E. Lago
  • Santiago Lago-Peñas
  • Jorge Martinez-Vazquez
  • Cristian Sepulveda

Abstract

This paper offers a comprehensive and updated survey of subnational revenue autonomy and vertical fiscal imbalance in fiscally decentralized systems. We argue that progress in understanding the effects of revenue decentralization has been fundamentally shaped by how it is measured, and that the widespread reliance on transfer-dependence proxies has generated persistent inconsistencies in the empirical literature. Moreover, distinguishing between optimal, actual, and excess Vertical Fiscal Imbalance is essential for policy design. We focus on the effects of revenue autonomy in enhancing spending efficiency, strengthening accountability, and promoting fiscal discipline, while also shaping outcomes in macroeconomic stability, economic growth, and regional redistribution. While the intricate nature of the subject does not allow for an all-inclusive survey, we aim to provide a thorough examination of the most salient effects of subnational revenue autonomy and the pervasiveness of vertical fiscal imbalances. We conclude by highlighting priorities for future research.

Suggested Citation

  • Manuel E. Lago & Santiago Lago-Peñas & Jorge Martinez-Vazquez & Cristian Sepulveda, 2026. "Revenue Decentralization and Vertical Fiscal Imbalance: A Survey," IDEAGOV Working Papers WP2611, IDEAGOV - International Center for Decentralization and Governance.
    • Handle: RePEc:ida:wpaper:wp2611
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    • 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
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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