Effects of Institutional and Political Factors on Fiscal Decentralization – The implications of corruption -

Abstract

The objective of this study is to investigate the effects of government system and political tendency on fiscal decentralization. For empirical analysis, a panel data set for 36 OECD countries from 1995 to 2017 is used. This study analyzes the determinants of fiscal decentralization around political and institutional factors, and furthermore, corruption is the main determinant of fiscal decentralization. This study classifies factors affecting fiscal decentralization into political and institutional factors such as presidential system, local government form, democratic level, and corruption level, and controlled GDP per capita, population density, land area and urbanization as control variables. The results show that most of the variables, except for the political orientation of policy makers, are acting as determinants of fiscal decentralization. First, the higher the level of decentralization of revenue in parliamentary cabinet rather than in presidential countries, and the higher the level of decentralization of expenditure in monarchy rather than in presidential countries. Second, although there are no consistent studies on fiscal decentralization and corruption, this study shows that decentralization of revenue and expenditure have a positive effect on corruption reduction, supporting the findings of Fisman & Gatti (2002), Arikan (2004). This study finds that fiscal decentralization is the determinants not only by economic factors but also by the presidential system, local government form and level of corruption. Above all, it is meaningful in that local governments can secure financial decision-making rights from the central government through reducing corruption and improving the level of democracy