Federalism, decentralisation and corruption

We investigate the empirical relationship between decentralisation and corruption. Using a newly assembled dataset containing data for up to 174 countries, we revisit the empirical evidence and seek to explain some of the inconsistent results that exist in the literature. We find that not only results differ due to the use of different specifications and data but more importantly because previous research overlooks the relationship between different dimensions of decentralisation. We propose an approach aimed at exploring the aggregate effect of decentralization on corruption. In this context, we analyze the existence of direct and indirect effects of these aspects on corruption. Our results suggest that fiscal (market) decentralisation is associated with lower corruption. However, we also find that constitutional decentralisation (federalism) is associated with higher corruption. Furthermore, we find that certain forms of political decentralisation worsen the positive effect of constitutional centralization on corruption. Finally, other forms of decentralisation such as spatial decentralisation do not appear to have a strong association with corruption. Our results suggest the possibility that previous empirical work may grossly overestimate de aggregate impact of decentralization and corruption.