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Institutions and growth : a simplified theory of decentralization and corruption

  • Anton Granik
  • Francesco Saraceno

    (OFCE)

This paper aims at giving a theoretical background to the, some- times observed, puzzling inverse correlation between the degree of de- centralization and economic growth. We provide evidence that there is some interaction between decentralization and corruption in ex- plaining growth. Within an endogenous growth model, we analyze the problem of a benevolent central government trying to determine the optimal degree of fiscal decentralization. Specifically, it can pro- duce a public good directly, but inefficiently, or it can delegate some (or all) of the production to more efficient local bureaucrats. In the latter case, however, some resources will be wasted because of corrup- tion and the costs linked to monitoring expenditures. With respect to the benchmark case, then, the possibility of corruption yields both a distorted allocation of resources (insufficient decentralization) and an overall under provision of the public good.

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Paper provided by Sciences Po in its series Sciences Po publications with number 2012-21.

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Date of creation: Jun 2012
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Handle: RePEc:spo:wpmain:info:hdl:2441/53r60a8s3kup1vc9k2cag6dp8
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