Moderating effects of corruption and informality on the fiscal decentralization—economic growth nexus: Insights from OECD countries

Abstract

The impact of fiscal decentralization on economic growth has been controversial in the literature, especially when this impact depends on the forms of fiscal decentralization and other moderating factors. This article investigates how expenditure decentralization and tax revenue decentralization affect economic growth, and how these impacts depend on corruption and informality in 23 OECD countries over the period 2002–16. By using estimators of fixed effect (FE), random effect (RE) and the system generalized method of moments (SGMM) for panel data; we find that economic growth is positively affected by both expenditure decentralization and tax revenue decentralization. Furthermore, corruption reduces not only economic growth but also the beneficial impact of expenditure decentralization on economic growth. Likewise, the presence of informality negatively affects not only economic growth but also the advantageous impact of tax revenue decentralization on economic growth. Results imply that unless governments control corruption and informality, the effectiveness of fiscal decentralization will not be attained as expected.