This paper provides a systematic analysis of fiscal decentralization on the quality of government by studying jointly its effects on electoral discipline and selection, in a setting where, realistically, voters only have limited information about fiscal policy in other jurisdictions, ruling out yardstick competition. Fiscal centralization reduces the extent of electoral discipline, as a corrupt (rent-seeking) incumbent can target good behavior only at a “minimum winning coalition” of regions (selective rent-diversion) in order to retain office, but thus makes it more profitable for bad incumbents to pool with good ones, thus increasing the probability of electoral discipline occurring at all. Voters tend to prefer centralization when politicians are low quality i.e. more likely to be corruptible. Centralization with uniform taxes can dominate both unconstrained centralization and decentralization, explaining why uniform taxes are so widely observed.
The link between fiscal decentralization and political accountability has so far received relatively little attention from economists. This may be in part because in the standard theory1 of fiscal decentralization, a basic premise is that policy-makers are benevolent. According to this perspective, the cost of decentralization is that spillovers are not internalized, and the benefit is that there is better preference-matching: that is, public goods provided by decentralized governments will be better matched to local preferences.2
This paper addresses the question of what effect fiscal (de)-centralization will have on electoral accountability in an environment where politicians can be non-benevolent i.e. rent-seeking. To make the argument as clear as possible, we assume an otherwise “level playing field”; that is, we work with a model where the traditional arguments in favour of either fiscal regime do not apply i.e. there are no inter-districtal spillovers or differences in voter preferences across districts.3 So, the difference in outcome between centralization and decentralization is entirely due to the difference in the extent to which the voters can control, or hold accountable, the incumbent, in the two cases.
We feel that this topic is of interest for several reasons. First, there is a general belief among donor governments and multi-lateral institutions, and those advising them, that political, as well as administrative, decentralization is a key part of any decentralization reform, because it increases the accountability of politicians to local voters. For example, the UK government's aid donor Ministry, DFID, says “Donors generally support decentralization. Decentralized cooperation, circumventing ineffectual central governments, has become a core part of development assistance.” (DFID, 2002). Or, according to Bahl and Martinez-Vasquez (2006), “Accountability to local voters is perhaps the most crucial part of a decentralized system, and one that ties together all the other components of decentralization design.”
The link between fiscal decentralization and political accountability has so far received relatively little attention from economists. This may be in part because in the standard theory1 of fiscal decentralization, a basic premise is that policy-makers are benevolent. According to this perspective, the cost of decentralization is that spillovers are not internalized, and the benefit is that there is better preference-matching: that is, public goods provided by decentralized governments will be better matched to local preferences.2
This paper addresses the question of what effect fiscal (de)-centralization will have on electoral accountability in an environment where politicians can be non-benevolent i.e. rent-seeking. To make the argument as clear as possible, we assume an otherwise “level playing field”; that is, we work with a model where the traditional arguments in favour of either fiscal regime do not apply i.e. there are no inter-districtal spillovers or differences in voter preferences across districts.3 So, the difference in outcome between centralization and decentralization is entirely due to the difference in the extent to which the voters can control, or hold accountable, the incumbent, in the two cases.
We feel that this topic is of interest for several reasons. First, there is a general belief among donor governments and multi-lateral institutions, and those advising them, that political, as well as administrative, decentralization is a key part of any decentralization reform, because it increases the accountability of politicians to local voters. For example, the UK government's aid donor Ministry, DFID, says “Donors generally support decentralization. Decentralized cooperation, circumventing ineffectual central governments, has become a core part of development assistance.” (DFID, 2002). Or, according to Bahl and Martinez-Vasquez (2006), “Accountability to local voters is perhaps the most crucial part of a decentralized system, and one that ties together all the other components of decentralization design.”
