Fiscal efficiency,redistribution and welfare |
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| Institution: | 1. Bilkent University, Ankara, Turkey;2. METU, Ankara, Turkey;1. Bank of Greece, Greece;2. Harokopio University, Greece;1. Faculty of Economics and Management of Nabeul, ENVIE, University of Carthage, Tunisia and Center for Research on the Economics of the Environment, Agri-food, Transports and Energy (CREATE), Canada;2. Laval University, Department of Agricultural Economics and Consumer Science, CREATE and Egg Industry Economic Research Chair, Canada;3. University of Carthage, Department of Industrial Economics, Polytechnic School of Tunisia, LEGI and Faculty of Economics and Management of Nabeul, Tunisia |
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| Abstract: | The expanding literature on fiscal decentralization (FD) emphasizes the role of institutional mechanisms for FD's welfare effects. We analyze the welfare effects of FD in case of a fiscal transfer mechanism that punishes inefficiency in tax collection and compensates for local income deficiency. In addition, a portion of transfers is earmarked for investment. Given a level of FD and these rules, the representative local government chooses its tax collection effort to maximize local utility. The solution of the model reveals that the stricter the redistributive rule, the higher are steady-state fiscal efficiency and welfare. While the effectiveness of the redistributive parameters increases with centralization of the revenue pool, it decreases with the tax rate. Both welfare and income distribution, on the other hand, improve with the degree of revenue centralization and the tax rate. Besides, fiscal efficiency and redistribution decrease with investment-earmarked transfers. |
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