The Impact of fiscal decentralization on income inequality in developing and developed countries

Abstract

Within the context of sustainable development goals, income inequality becomes a topic of significant interest for academics and policymakers. This study builds on previous literature finding a way to reduce income inequality and fiscal decentralization is one factor affecting income inequality. This study has objectives to investigate how fiscal decentralization affects income inequality and its asymmetric impact of fiscal decentralization on income inequality in both developing and developed countries. In order to analyze the impact of fiscal decentralization, this study applies the dynamic panel threshold model contributing a threshold for fiscal decentralization to compare its effects in two regimes. The results indicates that small amount of fiscal decentralization is negatively associated with income inequality. However, the share of subnational government expenditure helps to alleviate income inequality when it is greater than threshold, while it increases income inequality when it is lower than threshold in developed countries. The results suggest that distributional effects of fiscal decentralization should be concerned before implementing a transferring powers to local government since the impact of fiscal decentralization is asymmetric between developing and developed countries.