Publication: Fiscal centralization and the political process
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2010-01
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Abstract
We study the dynamic support for fiscal decentralization in a political agency
model from the perspective of a region. We show that corruption opportunities
are lower under centralization at each period of time. However, centralization
makes more difficult for citizens to detect corrupt incumbents. Thus, corruption
is easier under centralization for low levels of political competition. We show
that the relative advantage of centralization depends negatively on the quality of
the local political class, but it is greater if the center and the region are subject
to similar government productivity shocks. When we endogenize the quality of
local politicians, we establish a positive link between the development of the
private sector and the support for decentralization. Since political support to
centralization evolves over time, driven either by economic/political
development or by exogenous changes in preferences over public good
consumption, it is possible that voters are (rationally) discontent about it. Also,
preferences of voters and the politicians about centralization can diverge when
political competition is weak.
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Decentralization, Centralization, Political agency, Quality of politicians, Corruption