Tax Morale and (De-)Centralization- An Experimental Study

We consider a society composed of two regions. Each of them pro-vides a public good whose benefits reach beyond local boundaries.In case of decentralization, taxes collected by members of a regionare spent only on that region's public good. In case of centralization, tax receipts from the two regions are pooled and used tofinance both public goods according to the population size of eachregion. The experiment shows that centralization induces lower taxmorale and less efficient outcomes. The reasons are that centralization gives rise to an inter-regional incentive problem and createsinequalities in income between regions.