Decentralization, fiscal transfers and income inequality in Central and Eastern European countries

Suzana Makreshanska and Goran Petrevski

MPRA Paper from University Library of Munich, Germany

Abstract: Although income redistribution is primarily a central government responsibility, decentralization can improve or deteriorate the equity in resource and income redistribution depending on how the process of decentralization is designed and implemented. This paper provides empirical evidence on the association between fiscal decentralization and income distribution for a panel of 11 economies from Central and Eastern Europe (CEE) during 1995-2011. In these regards, we focus on three research topics: the effect of decentralization on income inequality; the effects of the structure of local government finance on income inequality; and the validity of the Kuznets-hypothesis. The main findings from the empirical exercise are as follows: first, we cannot provide firm evidence on the presumes favourable effects of fiscal decentralization on income distribution in the CEE countries; second, our empirical model suggests that the effects of fiscal decentralization on income inequality depend on the source of finance of sub-national governments, i.e. intergovernmental transfers might have a role in income equalization; third, we provide empirical support for the validity of the Kuznets-hypothesis in the CEE countries in which there is a nonlinear relationship between the level of economic development and income inequality.

Keywords: Fiscal decentralization; Fiscal transfers; GINI; Central and Eastern Europe; Panel Data Models (search for similar items in EconPapers)
JEL-codes: D31 H70 H73 (search for similar items in EconPapers)
Date: 2016-09-25, Revised 2017-10-16
New Economics Papers: this item is included in nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:82181

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