Fiscal Decentralization, Commitment and Regional Inequality: Evidence from State-level Cross-sectional Data for the United States
While conventional approaches to fiscal decentralization suggest that decentralization lowers the power of redistribution among regions, recent theories argue that fiscal decentralization works as a commitment device. In this manner, where the budget in a given region is highly dependent on transfers from the central government, there is an incentive for effort following fiscal decentralization. The former effect is argued to increase regional inequality, while the latter suggests a decrease in regional inequality. However no known empirical work has directly examined the relationship between fiscal decentralization and regional inequality. In this paper, cross-sectional data for the United States, excluding the convergence of regional income, are used to derive the net relationship. It is also the case that the direction of this effect on regional inequality depends on how fiscal decentralization is promoted. While the former distribution effect directly depends on the central government's share of power, the latter incentive effect depends on autonomy. Two measures that represent the power of the central government and autonomy are used to identify these effects. The results indicate that local expenditure or revenue share in fiscal decentralization has no significant effect on regional inequality, while the achievement of autonomy by fiscal decentralization has a negative effect on regional inequality. This supports the theory that fiscal decentralization works as a commitment device. The results also show that how fiscal decentralization is promoted is important for how it impacts on regional inequality.
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