Fiscal Decentralization, Political Heterogeneity and Welfare
Authors: Erkmen Giray Aslim, Bilin Neyapti
Date: February 2019
Working Paper 1903
Theoretical and empirical literature on ﬁscal decentralization has been thriving, while understanding the welfare implications of ﬁscal decentralization under political diversity necessitates further investigation. Authors Erkmen G. Aslim and co-author Bilin Neyapti contribute to this literature by formally modeling the interaction between the central government and local governments, where the latter may have varying degrees of political proximity to the former. The model solution reveals that the optimal tax rate is positively associated with ﬁscal decentralization, political unison, and spillovers across localities, while the local tax collection eﬀort is negatively associated with all of these parameters. The ﬁrst novel ﬁnding of this study is that both the welfare and the central government’s utility peak and income distribution is more equitable at a lower level of ﬁscal decentralization when spillovers exist than otherwise, which supports the decentralization theorem. The second novel ﬁnding is that both the amount of redistributable income and central government utility increases with political unison.
Fiscal decentralization; ﬁscal eﬃciency; welfare