The Effect of Fiscal Decentralization on Corruption: A Non-linear Hypothesis

Abstract

Abstract This study advances the literature on the effect of decentralization on corruption by proposing a theoretical motivation for the hypothesis that the corruptionminimizing decentralization arrangement prescribes intermediate decentralization degrees: a ‘middle’ decision-making power of local governors may mitigate the tradeoff between the rent-seeking incentive for local politicians and the effectiveness of their voters’ monitoring. The estimation of a non-linear empirical model strongly confirms that a decentralization degree between 15% and 21% minimizes corruption even through different estimation procedures, introduction of control variables and the use of internal and external IV and of alternative decentralization and corruption measurements.