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Fiscal Decentralization, Redistribution and Growth

Bilin Neyapti () and Zeynep Bulut-Cevik ()

Koç University-TUSIAD Economic Research Forum Working Papers from Koc University-TUSIAD Economic Research Forum

Abstract: This paper analyzes the welfare implications of a transfer mechanism in a fiscally decentralized economy where local governments select their tax collection effort to maximize their lifetime utility. We consider a transfer rule that both punishes for the lack of efficiency in tax-collection and compensates for the deviation of pre-tax or transfer income from a target level; in addition, a portion of transfers is considered to be directed towards investment. Simulations of the model’s optimal solution reveal that increasing punishment always results in increased steady state effort, despite the disincentives that increasing income compensation or directed investment may generate. Increasing punishment also improves capital accumulation the lower the rate of directed investments and the lower the tax rate. Further, efficiency in tax collection is achieved the lower the rate of directed investment and the higher the punishment rate.

Keywords: Fiscal decentralization; redistribution (search for similar items in EconPapers)
JEL-codes: E62 H71 O23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc, nep-cmp, nep-mac, nep-pbe and nep-ure
Date: 2011-06
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