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The Crowding in (out) Effect of Intergovernmental Transfers on Local Government Revenue Generation: Evidence from Pakistan

Tahir Yousaf (), Qurat ul Ain (), Yasmeen Akhtar () and Wasi Ul Hassan Shah ()
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Tahir Yousaf: Zhejiang University
Qurat ul Ain: Zhejiang University and COMSATS University Islamabad
Yasmeen Akhtar: University of Sargodha and COMSATS Universit
Wasi Ul Hassan Shah: Zhejiang Shuren University

Hacienda Pública Española / Review of Public Economics, 2022, vol. 242, issue 3, 3-28

Abstract: Literature on the fiscal incentives highlight the importance of how the design of intergovernmental transfer system has momentous implication on the local government’s behavior within devolved systems. The pragmatic results on the relationship between IGT and the incentive creation for the local government revenue generation are indecisive and differs across countries. Using a unique data set covering public finance and various socio economic data over the period 1990 to 2015 in Pakistan, thispaper contribute to fiscal federalism literature by evaluating the fiscal incentives of unconditional (general purpose) formula defined and conditional (specific purpose) ad hoc based transfers. After endogenity adjustments, our empirical results shows that unconditional formula based intergovernmental transfers/grants improve the mobilization of local government revenues while the conditional, ad hoc based transfers, deteriorate the mobilization of local revenue. However, in Pakistan large part of transfers are unconditional so the results suggest that transfers from the federal government complement local own source revenues generation by encouraging local governments in Pakistan to collect more revenues.

Keywords: Fiscal capacity; Inter-governmental transfers; Local public finance; Devolution; Taxation. (search for similar items in EconPapers)
JEL-codes: H29 H30 H71 H79 (search for similar items in EconPapers)
Date: 2022
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