Decentralization and corruption: Evidence from u.s. federal transfer programs

Abstract. While some recent evidence suggests that more decentralization is associated with reduced corruption, no empirical work has examined whether different types of decentraliz-ation have differential effects on corruption. The theoretical literature has emphasized that expenditure decentralization will only be effective if accompanied by the devolution of rev-enue generation to local governments. In this paper we examine this hypothesis empirically, by studying the mismatch between revenue generation and expenditure in U.S. states. Larger federal transfers are associated with higher rates of conviction for abuse of public office, supporting the theory that soft-budget constraints created by federal transfers are potentially problematic. 1