Accountability and fiscal equalization

Abstract

A common feature of multi-jurisdictional systems is equalization programs. The implementation of such programs, that is based on some measurement of sub-national fiscal capacity and effort, is particularly complex. Within a political economy model, this paper analyzes the impact of such systems on accountability, identifying a positive and a negative effect. The positive effect arises because with equalized fiscal resources, a consequence of equalization, citizens attach more importance to any remaining variation in public good supplies and so punish rent-taking more severely This induces politicians to restrain themselves and so accountability improves. The negative effect arises because the complexity of such programs reduces the informational content of observed public good supplies. This introduces a perverse fiscal incentive that reduces accountability. Thus, the overall impact of equalization programs on accountability depends on the balance of these effects. (C) 2008 Elsevier B.V. All rights reserved.