Fiscal Federalism and Foreign Transfers : Does Inter-Jurisdictional Competition Increase Foreign Aid Effectiveness?

This paper empirically studies the impact of decentralization and inter-jurisdictional competition on foreign aid effectiveness. For this purpose we examine a commonly used empirical growth model, considering different measures of fiscal decentralization. Our panel estimations reveal that expenditure decentralization and inter-jurisdictional competition – reflected by the degree of tax revenue decentralization – negatively impact aid effectiveness. We therefore conclude that donor countries should carefully consider how both anti-poverty instruments – foreign assistance and decentralization – work together