Decentralisation, Corruption and Economic Development

This paper studies the relationship between corruption and decentralisation from a macroeconomic perspective. Providing a macroeconomic analysis may help to understand better the links and channels between corruption, decentralisation and economic development. The analysis presented in this paper is unique in that provides an explicit formulation of the relationship between corruption, decentralisation and economic development. We bring together the theoretical and empirical predictions of both the traditional and modern fiscal federalism theories and find that the effect of decentralisation on development depends crucially on the existence and extent of corruption. Without corruption, decentralisation is unambiguously the best outcome for development. However, if corruption is pervasive, decentralisation may be associated to lower capital accumulation than centralisation. This result is more likely to be observed in developing countries with weak local political institutions and significant information asymmetries between the government and local administrations