Decentralization, Political Competition and Corruption∗

We study the effect of decentralization on corruption in a political agency model from the perspective of a region. In a model where corruption opportunities are lower under centralization at each period of time, decentralization makes easier for citizens to detect corrupt incumbents. As a consequence, the relationship between fiscal decentralization and corruption is conditional on political competition: decentralization is associated with lower (higher) levels of corruption for sufficiently high (low) levels of political competition. We test this prediction and find it is empirically supported. Also, we show how the preferences of voters and politicians about fiscal decentralization can diverge in situations where political competition is weak. JEL-Classification: H11, D72, D73, P16 Key-words: decentralization, centralization, political agency, corruption, quality of politicians. ∗This paper circulated previously as “Support for Decentralization, Quality of Politicians and Development”. We are thankful to the editor and two referees for their suggestions. Esther Hauk, Marcelo Leiras, Mariano Tommasi and seminar participants at Aarhus University, University of Birmingham and Universidad de Navarra, among others, provided helpful comments. We thank Alejandro Vicondoa for his excellent research assistance. We are specially thankful to Toke Aidt for his valuable comments and for providing the data on corruption, political competition and decentralization. Albornoz is grateful for support from the ESRC (RES-062-23-1360).