EconPapers    
Economics at your fingertips  
 

Optimal fiscal decentralization: Redistribution and welfare implications

Erkmen Aslim () and Bilin Neyapti ()

Economic Modelling, 2017, vol. 61, issue C, 224-234

Abstract: The literature has been inconclusive regarding the welfare effects of fiscal decentralization (FD), defined here as the extent to which local governments collect and spend local tax revenues. We present an original model to investigate formally the distributional and welfare implications of FD. In contrast to the standard approach that compares the implications of full FD with that of centralization, we consider that the central government chooses the level of FD to maximize welfare in a heterogeneous country. Noncooperatively, local governments choose their tax collection effort to maximize local utility. We show that an increase in the tax rate leads optimal FD to increase so as to compensate for the welfare loss from decreasing optimal local tax effort. Hence, welfare and income distribution improve in FD at its intermediate, rather than extreme, levels. We coin this result as the decentralization-Laffer curve. As regional spillovers increase, FD is less desirable as it deteriorates welfare and income distribution. This finding provides a novel support for the decentralization theorem and contributes to the fiscal policy debate.

Keywords: Fiscal decentralization; Welfare; Fiscal efficiency; Income distribution (search for similar items in EconPapers)
JEL-codes: E62 H77 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0264999316308252
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:61:y:2017:i:c:p:224-234

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

 
Page updated 2019-09-29
Handle: RePEc:eee:ecmode:v:61:y:2017:i:c:p:224-234