Institutions and growth : a simplified theory of decentralization and corruption
Abstract
This paper aims at giving a theoretical background to the, some-
times observed, puzzling inverse correlation between the degree of de-
centralization and economic growth. We provide evidence that there
is some interaction between decentralization and corruption in ex-
plaining growth. Within an endogenous growth model, we analyze
the problem of a benevolent central government trying to determine
the optimal degree of fiscal decentralization. Specifically, it can pro-
duce a public good directly, but inefficiently, or it can delegate some
(or all) of the production to more efficient local bureaucrats. In the
latter case, however, some resources will be wasted because of corrup-
tion and the costs linked to monitoring expenditures. With respect to
the benchmark case, then, the possibility of corruption yields both a
distorted allocation of resources (insufficient decentralization) and an
overall under provision of the public good.
Origin : Publisher files allowed on an open archive