Decentralization and electoral accountability: Incentives, separation and voter welfare

Article history: Received 26 June 2008 Received in revised form 20 January 2009 Accepted 23 January 2009 Available online 4 February 2009 This paper provides a systematic analysis of fiscal decentralization on the quality of government by studying jointly its effects on electoral discipline and selection, in a settingwhere, realistically, voters only have limited information aboutfiscal policy in other jurisdictions, ruling out yardstick competition. Fiscal centralization reduces the extent of electoral discipline, as a corrupt (rentseeking) incumbent can target good behavior only at a “minimumwinning coalition” of regions (selective rent-diversion) in order to retain office, but thus makes it more profitable for bad incumbents to pool with good ones, thus increasing the probability of electoral discipline occurring at all. Voters tend to prefer centralization when politicians are low quality i.e. more likely to be corruptible. Centralization with uniform taxes can dominate both unconstrained centralization and decentralization, explaining why uniform taxes are so widely observed. © 2009 Elsevier B.V. All rights reserved. JEL classification: D72 D73 H41