Fiscal Decentralization, Political Heterogeneity and Welfare

This paper contributes to the literature on fiscal decentralization by presenting a formal model of interaction between central and local governments (CG LGs, respectively) where LGs may differ in their degree political alignment with CG. The non-cooperative optimal behaviour agents reveals that tax increases extent (FD), unison spillovers across localities, while LGs' collection effort is negatively associated all these parameters. first novel finding our study both welfare peaks income distribution are more equitable at lower level FD case than no spillovers, which supports theorem. second amount redistributable government utility increase unison.