Fiscal centralization: a remedy for corruption?

The empirical evidence on the relationship between political decentralization and corruption is far from clear. We develope a model that analizes the relationship between decentralization and corruption and show how cost-benefit calculations can lead public administrations to tolerate a certain degree of corruption. In the model economy, the centralized provision of public goods might be more efficient than their decentralized provision, but under very restrictive conditions. Decentralization, on the other hand, is more efficient where there exists heterogeneity across jurisdictions. In this scenario, the descentralized provision of public goods would be more efficient because regional governments would dedicate optimal amounts of funding to fighting corruption, while their centralized provision might lead to the over or under-allocation of resources.