Fiscal Decentralization: Does The Source Of Revenue Matter?

Fiscal Decentralization: does the Source of Revenue Matter? Evidence from Rural India Pallavi Jain Govil Adviser: Professor Timothy J. Goodspeed Is the pattern of expenditures of village governments related to their sources of revenue? Do village governments use own-source revenues more efficiently than transfer grants to provide public services to their constituents? This paper begins with the premise that local governments are more participative, more acceptable, and more accountable and hence, deliver better. I use a policy change introduced in 1997 in province of Madhya Pradesh in India, whereby the power to collect royalty and lease rents on minor mineral mines and fishing tanks was transferred to village governments, as a natural experiment and examine whether expenditure patterns of villages that received such resources differ from those that did not. I find that village governments choose to spend their fiscal resources differently depending on where the money comes from, even if these resources are completely `untied\u27 and could be spent entirely at the discretion of the village governments. I also compare the social outcomes in villages that gained such additional resources to those that didn\u27t, and thus remained more dependent on transfer grants from the state and central government for their development needs. Using village level data, I find evidence to support the hypothesis that fiscal decentralization through assignment of taxation powers is more effective in achieving desired outcomes as compared to a transfer of an equal amount of resources by way of grants