Does fiscal decentralization mitigate the adverse effects of corruption on public deficits?

Abstract

The current economic crisis has led several rich countries to experience severe fiscal deficits. Among other factors responsible for the situation, corruption is considered harmful to public finances and appears closely related to fiscal deficits. This paper opens a new avenue in addressing the effects of corruption on public deficits through fiscal decentralization. Focusing on a sample of 31 OECD countries over the period 1986-2010, we find that fiscal decentralization contributes to mitigating the perverse effects of corruption in public deficits. In addition, our findings indicate heterogeneity in the effect of fiscal decentralization, since it appears related to lower deficits in countries with higher levels of corruption, but not in less corrupt countries. Therefore, the results suggest that bringing the government closer to the people in relatively corrupt countries may lead to a more responsible fiscal management.

Desentralisasi fiskal dan probabilitas terjadinya korupsi: Sebuah bukti empiris dari Indonesia

“…Ini karena penerapan desentralisasi memudahkan masyarakat untuk mengawasi dan mendeteksi para pejabat-pejabat yang korup di daerahnya tersebut (Fiorino et al, 2012;Albornoz dan Cabrales 2013). Desentralisasi fiskal berkontribusi untuk mengurangi korupsi pada daerah yang memiliki anggaran belanja yang defisit (Peralías et al, 2013). Riset Freille et al, (2007) menemukan hasil yang tidak konsisten ketika menguji hubungan tiga dimensi variabel desentralisasi, yaitu konstitusi, politik dan fiskal dengan korupsi pada 174 negara.…”

Virtual Versus Physical Government Decentralization: Effects on Corruption and the Shadow Economy

“…Both shadow economy and corruption might be affected by government decentralization (see, for example, Goel and Nelson ; Oto‐Peralias, Romero‐Ávila, and Usabiaga ; Teobaldelli ). For instance, better monitoring and oversight brought about by decentralization would reduce both shadow and corrupt practices, while greater proximity between the public and the bureaucracy might empower and embolden some bureaucrats to engage in corrupt and/or shadow activities.…”

“…Whereas the effects of various types of decentralization on institutional quality in general and on corruption and shadow economy in particular have been studied (see for example, Buehn, Lessmann, and Markwardt ; Dell'Anno and Teobaldelli ; Fan, Lin, and Treisman ; Fisman and Gatti ; Goel and Nelson ; Goel and Saunoris ; Oto‐Peralias, Romero‐Ávila, and Usabiaga ), the main contribution of the present work is in examining the effect of virtual decentralization.…”

Analyzing Forces to the Financial Contribution of Local Governments to Sustainable Development

“…This technique uses the lagged levels of the endogenous regressors as instrumental variables and combines the moment conditions for the equations in first-differences with additional moment conditions implied for equations in level to improve efficiency [80]. Furthermore, in order to take into account the heteroscedasticity problems, we applied the two-step estimation.…”