Fiscal Decentralization and Governance

Based on cross-country data for up to 78 countries, this paper shows that fiscal decentralization-the assignment of expenditure and revenue mobilization functions to subnational levels of government-is associated with various indicators of governance, such as corruption, rule of law, and government effectiveness. Unlike previous studies in the decentralization/governance literature, which focus primarily on expenditure-based measures of decentralization, the results reported in this paper show that the relationship between decentralization and governance depends on how subnational expenditures are financed. The higher the share in total subnational revenues of nontax revenues and grants and transfers from higher levels of government, the stronger the association between decentralization and governance.Governance;decentralization, revenue mobilization, fiscal decentralization, subnational governments, federalism, bank policy, fiscal federalism, decentralization of tax, subnational government, public budgeting, decentralization process, decentralization indicator, decentralization indicators, expenditure decentralization, subnational expenditures, tax autonomy, subnational tax, subnational levels, subnational jurisdictions, government finance, decentralized governments, macroeconomic stability, decentralization programs, decentralization of expenditure, bank supervision, bank research, decentralized systems, subnational expenditure, revenue source, transition economy, subnational authority, local revenue