How Effective Is Fiscal Decentralization for Inequality Reduction in Developing Countries?

Abstract

The relationship between fiscal decentralization and vertical inequality has long received attention by fiscal federalism theorists. However, horizontal inequality has been largely overlooked. This study will present a novel empirical examination of the relationship between fiscal decentrali-zation, vertical inequality, and horizontal inequality. Specifically, it will focus on how institutional quality and military expenditure affect the fiscal decentralization–inequality nexus across 33 developing countries in the period 1990–2014. Findings indicate that varieties of fiscal authority have a significant effect on distribution of income and ethnic inequality. This depends on the level of institutions and defense spending achieved by these developing countries.