Decentralization and Corruption: Evidence Across Countries

The relationship between decentralization of government activities and the extent of rent extraction by private parties is an important element in the recent debate on institutional design. The theoretical literature makes ambiguous predictions about this relationship, and it has remained virtually unexamined by empiricists. In this paper, we make a first attempt at examining this issue empirically, by looking at the cross-country relationship between fiscal decentralization and corruption as measured by a number of different indices. Our estimates suggest a strong negative relationship between fiscal decentralization in government expenditure and corruption. Moreover, we find that legal origin performs extremely well as an instrument for decentralization. When instrumenting in this way, the estimated relationship between decentralization and corruption is even stronger. ? We thank Shantayanan Devarajan for useful conversations and seminar participants at the IX Conference of the Italian Society of Public Economics and the World Bank for valuable comments. The views expressed here do not necessarily reflect those of the World Bank or its member countries. Please send correspondence to [email protected] or [email protected].