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The relationship between decentralization of government activities and the extent of rent extraction by private parties is an important element in the recent debate on institutional design. The theoretical literature makes ambiguous predictions about this relationship, and it has remained little studied by empiricists. In this paper, we systematically examine this issue empirically, by looking at the cross-country relationship between fiscal decentralization and corruption, as measured by a number of different indices. Our estimates suggest that fiscal decentralization in government expenditure is strongly and significantly associated with lower corruption; these results persist when decentralization is instrumented for by the origin of a country’s legal system.
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