Regional Competition, Business Politicians, and Subnational Fiscal Policy

Abstract

What explains subnational policy choices over tax cut after decentralization? We test two different explanations in the context of the 2002 tax reform in Russia. A popular strand of literature suggests that decentralization induces more regional competition over investment, motivating subnational tax cuts. A second body of literature suggests that personal business interests of regional governors can account for their different policy choices. Governors with personal business ties refrain from tax cuts because they increase market competition.We find no support for the regional competition hypothesis, but strong statistical evidence for the business connection hypothesis. Our findings have important implications for research on fiscal decentralization and on the connections between business interests of leaders and their policy choices.

Keywords: Fiscal Policy, Decentralization, Business and Politics, Russia