Public Choice

, Volume 113, Issue 1, pp 25-35

First online:

Decentralization and Corruption: Evidence from U.S. Federal Transfer Programs

  • Raymond FismanAffiliated withColumbia University GSB
  • , Roberta GattiAffiliated withDevelopment Research Group, The World Bank

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While some recent evidence suggests that more decentralizationis associated with reduced corruption, no empirical work hasexamined whether different types of decentralization havedifferential effects on corruption. The theoretical literaturehas emphasized that expenditure decentralization will only beeffective if accompanied by the devolution of revenuegeneration to local governments. In this paper we examine thishypothesis empirically, by studying the mismatch betweenrevenue generation and expenditure in U.S. states. Largerfederal transfers are associated with higher rates ofconviction for abuse of public office, supporting the theorythat soft-budget constraints created by federal transfers arepotentially problematic.