Institutions and growth: A simplied theory of decentralization and corruption

Anton Granik and Francesco Saraceno
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Anton Granik: Reims Management School, Postal: 59, rue Pierre Taittinger BP 202 Reims Cedex

No 2012-21, Documents de Travail de l'OFCE from Observatoire Francais des Conjonctures Economiques (OFCE)

Abstract: 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.

Keywords: Fiscal federalism; corruption; Endogenous growth; Public Capital; Fiscal policy (search for similar items in EconPapers)
JEL-codes: D73 H1 H2 H4 H7 (search for similar items in EconPapers)
Date: 2012-06
New Economics Papers: this item is included in nep-fdg, nep-geo and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:fce:doctra:1221

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