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Fiscal Decentralization, Redistribution and Growth

  • Bilin Neyapti


    (Bilkent University)

  • Zeynep Burcu Bulut-Cevik



This paper analyzes the welfare implications of a transfer mechanism in a fiscally decentralized economy where local governments select their tax collection effort to maximize their lifetime utility. We consider a transfer rule that both punishes for the lack of efficiency in tax-collection and compensates for the deviation of pre-tax or transfer income from a target level; in addition, a portion of transfers is considered to be directed towards investment. Simulations of the model’s optimal solution reveal that increasing punishment always results in increased steady state effort, despite the disincentives that increasing income compensation or directed investment may generate. Increasing punishment also improves capital accumulation the lower the rate of directed investments and the lower the tax rate. Further, efficiency in tax collection is achieved the lower the rate of directed investment and the higher the punishment rate.

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Paper provided by Koc University-TUSIAD Economic Research Forum in its series Koç University-TUSIAD Economic Research Forum Working Papers with number 1114.

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Length: 18 pages
Date of creation: Jun 2011
Date of revision:
Handle: RePEc:koc:wpaper:1114
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  1. Jorge Martínez-Vázquez & Robert M. McNab, . "Fiscal Decentralization, Macrostability And Growth," Working Papers 11-03 Classification-JEL , Instituto de Estudios Fiscales.
  2. International Monetary Fund, 2000. "Can Fiscal Decentralization Strengthen Social Capital?," IMF Working Papers 00/129, International Monetary Fund.
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