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Fiscal decentralization and regional disparities: the importance of good governance

  • Leonel Muinelo-Gallo


    (Universidad de la República (Uruguay). Facultad de Ciencias Económicas y de Administración. Instituto de Economía)

  • Andreas P. Kyriacou


    (Universitat de Girona (España). Departament d’Economia)

  • Oriol Roca-Sagalés


    (Universitat Autònoma de Barcelona (España). Departament d’Economia Aplicada)

In this paper we consider how government quality mediates the relationship between fiscal decentralization and regional disparities. Previous work has argued that fiscal decentralization has the potential to reduce income difference across regions but that this potential may not be realized because of governance problems associated with subnational authorities. Our empirical evidence based on a sample of 24 OECD countries over the period 1984 to 2006 lends a measure of support to this idea. We find that fiscal decentralization promotes regional convergence in high government quality settings but, worryingly, it leads to wider regional disparities in countries with poor governance. Because most poor countries are plagued with governance problems, this would caution against fiscal decentralization with a view to reducing regional disparities in these countries.

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Paper provided by Instituto de Economía - IECON in its series Documentos de Trabajo (working papers) with number 13-03.

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Length: 32 pages
Date of creation: Mar 2013
Date of revision:
Handle: RePEc:ulr:wpaper:dt-03-13
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