On Delegating the Distribution Role of Central Government to State Governments Some Political Economy Issues

Abstract

While empirical findings remain unsettled on whether greater fiscal decentralization would improve state level equity, there is no unique theoretical model that provides for such basis. Simultaneously, there is rather scant knowledge on the theoretical consequences of deepening fiscal federalism on the trade-off between efficiency and equity in delivering local public goods. Hence, the purpose of this paper is to bridge these gaps and develop a hypothetical scenario of ascertaining the effects of delegating conventional central government’s commitment to combat income inequality to statelevel governments instead. Our results unfold that devolvement of such responsibility may improve state level equity but at the expense of state level efficiency under specific circumstances. However, our findings are indeed susceptible to the magnitude of specific random events affecting local states relative to federal government and the degree of commitment of state governments. Further scenarios are discussed to track the endogeneity of local politicians and bureaucrats in this redistributive process. In particular, their strategic motives are found to yield contradictory, if not ambiguous, results that question out the entire issue of delegation.