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Decentralization, fiscal transfers and income inequality in Central and Eastern European countries

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  • Makreshanska, Suzana
  • Petrevski, Goran

Abstract

Although income redistribution is primarily a central government responsibility, decentralization can improve or deteriorate the equity in resource and income redistribution depending on how the process of decentralization is designed and implemented. This paper provides empirical evidence on the association between fiscal decentralization and income distribution for a panel of 11 economies from Central and Eastern Europe (CEE) during 1995-2011. In these regards, we focus on three research topics: the effect of decentralization on income inequality; the effects of the structure of local government finance on income inequality; and the validity of the Kuznets-hypothesis. The main findings from the empirical exercise are as follows: first, we cannot provide firm evidence on the presumes favourable effects of fiscal decentralization on income distribution in the CEE countries; second, our empirical model suggests that the effects of fiscal decentralization on income inequality depend on the source of finance of sub-national governments, i.e. intergovernmental transfers might have a role in income equalization; third, we provide empirical support for the validity of the Kuznets-hypothesis in the CEE countries in which there is a nonlinear relationship between the level of economic development and income inequality.

Suggested Citation

  • Makreshanska, Suzana & Petrevski, Goran, 2016. "Decentralization, fiscal transfers and income inequality in Central and Eastern European countries," MPRA Paper 82181, University Library of Munich, Germany, revised 16 Oct 2017.
  • Handle: RePEc:pra:mprapa:82181
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    File URL: https://mpra.ub.uni-muenchen.de/82181/1/MPRA_paper_82181.pdf
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    References listed on IDEAS

    as
    1. Christian Lessmann, 2012. "Regional inequality and decentralization: an empirical analysis," Environment and Planning A, Pion Ltd, London, vol. 44(6), pages 1363-1388, June.
    2. Andrés Rodríguez-Pose & Roberto Ezcurra, 2010. "Does decentralization matter for regional disparities? A cross-country analysis," Journal of Economic Geography, Oxford University Press, vol. 10(5), pages 619-644, September.
    3. Qiao, Baoyun & Martinez-Vazquez, Jorge & Xu, Yongsheng, 2008. "The tradeoff between growth and equity in decentralization policy: China's experience," Journal of Development Economics, Elsevier, vol. 86(1), pages 112-128, April.
    4. Neyapti, Bilin, 2006. "Revenue decentralization and income distribution," Economics Letters, Elsevier, vol. 92(3), pages 409-416, September.
    5. Cristian F Sepulveda & Jorge Martinez-Vazquez, 2011. "The consequences of fiscal decentralization on poverty and income equality," Environment and Planning C: Government and Policy, Pion Ltd, London, vol. 29(2), pages 321-343, April.
    6. Agnese Sacchi & Simone Salotti, 2014. "The Effects of Fiscal Decentralization on Household Income Inequality: Some Empirical Evidence," Spatial Economic Analysis, Taylor & Francis Journals, vol. 9(2), pages 202-222, June.
    7. Era Dabla-Norris, 2006. "The Challenge of Fiscal Decentralisation in Transition Countries," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 48(1), pages 100-131, March.
    8. Christian Lessmann, 2012. "Regional inequality and decentralization: an empirical analysis," Environment and Planning A, Pion Ltd, London, vol. 44(6), pages 1363-1388, June.
    9. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 38(2), pages 112-134.
    10. Vassilis Tselios & Andrés Rodríguez-Pose & Andy Pike & John Tomaney & Gianpiero Torrisi, 2012. "Income inequality, decentralisation, and regional development in Western Europe," Environment and Planning A, Pion Ltd, London, vol. 44(6), pages 1278-1301, June.
    11. Agnese Sacchi & Simone Salotti, 2014. "How regional inequality affects fiscal decentralisation: accounting for the autonomy of subcentral governments," Environment and Planning C: Government and Policy, Pion Ltd, London, vol. 32(1), pages 144-162, February.
    12. Thushyanthan Baskaran & Lars P. Feld & Jan Schnellenbach, 2016. "Fiscal Federalism, Decentralization, And Economic Growth: A Meta-Analysis," Economic Inquiry, Western Economic Association International, vol. 54(3), pages 1445-1463, July.
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    More about this item

    Keywords

    Fiscal decentralization; Fiscal transfers; GINI; Central and Eastern Europe; Panel Data Models;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects

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