Regional Inequalities, Fiscal Decentralization and Government Quality

There are theoretical arguments supporting the view that regional income inequalities, the degree of fiscal decentralization and the quality of government are simultaneously determined. This article argues that existing empirical work has failed to adequately deal with this possibility. In light of this, it applies a simultaneous equation model which accounts for the joint determination of these three variables, to a sample of 23 OECD countries. The empirical evidence that emerges from the analysis suggests that a process of fiscal decentralization, accompanied by measures to improve the quality of government, would be an effective strategy for reducing regional inequalities.