Information Theory and an Entropic Approach to an Analysis of Fiscal Inequality

Duc Vo

MPRA Paper from University Library of Munich, Germany

Abstract: In his influential study, Theil (1967) developed the notion of entropy on the basis of information theory. He then advocated the use of entropy-based measure for the analysis of income inequality. In this paper, the first of its kind, we apply Theil’s notion of entropy to public finances in multi-tiered governments, in particular for a measurement of fiscal decentralisation, which is currently very crude in terms of the ratio between local government revenue and total revenue. It is the claim of this paper that such an approach of measuring fiscal decentralisation completely ignores important distributional aspects of fiscal arrangements. Findings from this paper indicate that studies on measuring various aspects of fiscal activities—such as fiscal decentralisation—should carefully take into account the dispersion of revenue (and expenditure) across regions. On that basis, the entropic approach developed in this paper is able to accommodate these dispersions across subnational governments. As an illustration for the case of Vietnam, the true degree of fiscal decentralization has e�ectively been decreased in comparison with estimates from other simple measurements due to the presence of substantial dispersions of revenue and expenditure from the subnational governments across 63 provinces in Vietnam

Keywords: entropy; dispersion; entropic approach; fiscal decentralisation; measurement (search for similar items in EconPapers)
JEL-codes: C02 H11 H27 H50 H77 (search for similar items in EconPapers)
Date: 2019-06-28
New Economics Papers: this item is included in nep-pbe and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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