Does decentralization reduce income inequality? Only in rich states

Abstract

We investigate the relationship between fiscal decentralization and income inequality using data from U.S. states over three and a half decades. Our study contributes to the literature in several ways in terms of empirical methodology and specification. First, we take into account integration and cointegration properties of the data and estimate the cointegrating relationship between fiscal decentralization and income inequality using Fully Modified Ordinary Least Squares, following Pedroni (2000). Second, we investigate the direction of the causality. Finally, and perhaps most importantly, we investigate if the relationship between fiscal decentralization and income inequality is conditional on income in each state. We find that fiscal decentralization does reduce income inequality, but only in rich states. We also find that causality runs from fiscal decentralization to income inequality, not the other way around.

Decentralized Economic Complexity in Switzerland and Its Contribution to Inclusive and Sustainable Change

“…Switzerland's historically grown internal economic complexity, its decentralized system of governance and its high rates of migration may have crucially contributed to its global economic competitiveness as well as its good performance in social and environmental terms. Even though recent empirical research on the impact of decentralized political systems on social inequality has shown rather mixed results in countries such as the USA [32], the Americas [33] and China [34], the degree of social inequality in the federal system of Switzerland remains comparatively low [22]. However, since Switzerland has not changed its federal system in any substantial form since its foundation in 1848, and its economy was less affected by the two World Wars than in the rest of Europe, it is difficult to investigate how social equality would have fared under different circumstances.…”

The impact of fiscal decentralization on growth, inflation and inequality in the Americas

“…Concerning fiscal decentralization, poverty and income distribution, significant contributions include Boex and others (2006), which in addition to providing a comprehensive survey of the literature on the topic offers a set of qualitative suggestions for conducting decentralization reforms from a propoor perspective; Sepúlveda and Martínez-Vázquez (2011), which takes a large dataset of countries and finds that fiscal decentralization appears to reduce poverty as long as the share of subnational expenditures is no greater than one third of total government expenditures, and also to reduce income inequality, but only if general government represents a significant share of the economy; Goerl and Seiferling (2014), which takes a large dataset of countries and finds that the decentralization of government expenditures can help achieve a more equal distribution of income if a number of conditions are met; and Sacchi and Salotti (2014), which looks at a set of OECD countries and finds that a higher degree of tax decentralization is associated with higher household income inequality. At the individual country level, a sample of works includes Moon (2003) for South Korea, Song (2013) for China and Cavusoglu and Dincer (2015) for the United States.…”

Does Fiscal Decentralization Affect Infrastructure Quality? An Examination of U.S. States

“…3 If decentralization is effective 3. There are several studies that have examined both expenditure and revenue decentralization such as Treisman (2002), Neyapti (2006), Gemmell, Kneller, and Sanz (2013), and Cavusoglu and Dincer (2015). Neyapti (2006) notes that the literature finds revenue decentralization to have similar effects as expenditure decentralization, and that institutional environment is important when examining fiscal decentralization.…”

“…As is the case with the country‐level data, Stansel () argues that decentralization leads to greater economic growth. More recently, Cavusoglu and Dincer () examine fiscal decentralization and income inequality across U.S. states and find that for wealthier states fiscal decentralization reduces income inequality.…”