Decentralization, political competition and corruption

Abstract

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 it 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 that 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.