Decentralization and Income Inequality in a Panel and Cross‐Section of Countries

Decentralization has been a common public finance reform among developing countries in the past few decades. Some advocates pushed for decentralization reform as an answer to the growing problem of income inequality. The primary argument for decentralization is that subnational governments have better information on the needs and preferences of local citizens, while the primary argument against it is that the central government has better economies of scale in delivering public services and usually has better access to important resources. This study tested for the relationship between decentralization and income inequality using both panel data and an annual averaged cross‐section data of countries with varying income levels. The results suggest that revenue decentralization is weakly associated with lower income inequality. In addition, there is also a weak evidence that fiscal independence is associated with higher income inequality, although this is moderated by government effectiveness. Expenditure decentralization has no significant relationship with inequality. © 2020 John Wiley & Sons, Ltd.