Fiscal Federalism and Foreign Transfers: Does Inter-Jurisdictional Competition Increase Foreign Aid Effectiveness?
24 Pages Posted: 11 Jan 2011 Last revised: 14 Jan 2011
Date Written: October 10, 2010
This paper empirically studies the impact of decentralization and inter-jurisdictional competition on foreign aid effectiveness. For this purpose we examine a commonly used empirical growth model, considering different measures of fiscal decentralization. Our panel estimations reveal that expenditure decentralization and inter-jurisdictional competition – reflected by the degree of tax revenue decentralization – negatively impact aid effectiveness. We therefore conclude that donor countries should carefully consider how both anti-poverty instruments – foreign assistance and decentralization – work together.
Keywords: Foreign Aid, Growth, Interjurisdictional Competition
JEL Classification: O1, O2, O4, H7
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