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This paper analyzes which of various plausible determinants are significantly related to an index of "perceived corruption" compiled from business risk surveys for the mid-1990s. Using 2SLS to reduce problems of endogeneity and a variation of Leamer's "extreme bounds analysis" to test for robustness, it finds three factors robustly significant. Countries that were more economically developed and those which are former British colonies were rated "less corrupt". Those which have a federal structure were "more corrupt". Daniel Treisman Assistant Professor Department of Political Science University of California, Los Angeles 4289 Bunche Hall LA CA 90095-1472 Treisman@polisci.ucla.edu First Draft September 1997 Revised April 1998 ####

Second generation theories of federalism extend traditional approaches by systematically studying the role of government incentives in economic performance. Providing government with the incentive to promote markets is especially acute for developing economies or those in transition from central planning. In these countries, governments have often been the central barrier to economic development. In this paper, we investigate empirically decentralization and fiscal incentives in the central-provincial relationship during China's reform. We find strong correlations between local government revenue collection and local government expenditure. Further, we show that China's fiscal contracting system provides local governments with strong (marginal) fiscal incentives and at the same time improves horizontal distribution across provinces in budgetary spending. We also find that stronger fiscal incentives — measured in terms of higher marginal revenue retention rate — implies faster development of non-state enterprises and more reform in state-owned enterprises. Finally, we compare federalism, Chinese style, with federalism, Russian style. 1

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A long-standing concern in political economy is whether outcomes are efficient in political equilibrium. Recent contributions have examined the efficiency/inefficiency of policy choices from a theoretical point of view. The aim of this paper is to examine such issue empirically. Building on existing “economic ” diagnoses that highlight the deficient incentives present in Argentina’s Federal Tax-Sharing Agreement the paper will attempt to understand the politics behind its adoption and persistence. We suggest an explanation based on the transaction costs of Argentina’s political market. Although potentially Pareto-improving policies could could have been adopted, they were not introduced because of the uncertainty over the future status of today’s bargains, and given the lack of institutions to enforce bargains among the political actors. The paper concludes offering some preliminary ideas for institutional engineering: what governance structures could help reduce these transaction costs? The purpose is to create an institutional framework in which political actors could negotiate among themselves, ensuring the enforceability of agreements, in order to achieve more efficient outcomes. * Centro de Estudios para el Desarrollo Institucional (CEDI) Fundación Gobierno & Sociedad and Universidad de San Andrés. This paper is a substantially revised and abridged version of the one prepared for the Conference on “Modernization and Institutional Development in

Abstract: This paper revisits the influential “Leviathan ” hypothesis, which posits that tax competition limits the growth of government spending in decentralized countries. It uses panel data to examine the effect of fiscal decentralization over time within countries, attempting to distinguish between decentralization that is funded by intergovernmental transfers and local taxation. First, it sets out a logic whereby decentralization should restrict government spending if state and local governments have wide-ranging authority to set the tax base and rate, especially on mobile assets. In countries where this is most clearly the case, decentralization retards the growth of government. Second, consistent with theoretical arguments drawn from welfare economics and positive political economy, it shows that governments grow faster as they fund a greater portion of public expenditures through intergovernmental transfers.

Although, on the surface, the achievements of the Indian economy during the past two decades paint a comforting macroeconomic picture, the accompanying rapid expansion in fiscal deficits is unsustainable. The current fiscal problems existing in the states can be attributed to the increasing subsidies on publicly supplied goods and services, inter-state competition in attracting investment through tax incentives, and overstaffing of administrations and public enterprises. The federal structure of India’s fiscal system also implies difficulties in improving the states ’ finances. After discussing ways to reform taxes and expenditure, this paper identifies high explicit and implicit subsidies as a major cause of the fiscal problems at the central and state level. Reducing these subsidies requires far-reaching changes in the domestic political economy. The paper also analyzes the fiscal impact of disinvestment. To achieve the goals of development, fiscal sustainability is indispensable. Although there are some positive signs, a political consensus on and commitment to fiscal reform are yet to emerge.

In this paper, I provide a review of the scope and limits for government and international action to prevent the outbreak of civil war. I begin with a brief review of the literature on violent conflict indicators and identify the most significant predictors of civil war outbreak. I explicitly focus on models and empirical approaches used by World Bank-related research on conflict. By applying commonly used indicators of civil violence to a recently compiled database of civil war, I provide simple predictions of the risk of civil war onset in more than 150 countries. I then review the literature on strategies that can be used by governments and/or international organizations (the United Nations and the World Bank in particular) to prevent the outbreak of civil war. I focus on four strategies: redistribution to reduce prevailing inequities; political decentralization; secession or partition; and multidimensional peacebuilding. I review lessons learned on the usefulness of these strategies in preventing war and also consider risks associated with each of these strategies: moral hazard problems; normchanging problems; and resource constraint problems. The paper is intended to provide a synthesis of available knowledge on the topic of organized political violence, focusing on the World Bank's work in the area of conflict analysis and conflict prevention and linking that work with the literature on secession, decentralization, and international intervention in civil wars. 1.

Many policies in the United States are jointly determined by federal and state actions. In the game theoretic model offered here, politicians in both the state and national governments seek credit for providing goods desired by the public and avoid blame for the taxes necessary to provide the goods. In line with Peterson’s (1995) theory of functional federalism, the level of government that is better able to supply particular goods and services tends to take the lead in their provision, even to the extent of fully crowding out much less efficient governments. However, under a broad set of circumstances, both state and national politicians seek credit via public spending, and their joint provision leads to a relative “oversupply ” of public goods and services, and thus to “overtaxation. ” Under joint provision, states vary in their responses to changing federal spending patterns based both on the causes of the national changes and on state characteristics. In 1966, Morton Grodzins noted that American federalism does not resemble a “layer cake, ” with specific governmental functions assigned to particular levels of government, but rather a “marble cake, ” with governmental responsibilities intertwined among the national government, states, and localities. Numerous scholars of federalism subsequently assessed this observation across

A constitution may prescribe a division of power between states and the federal government, but written rules do not eliminate the essential problem of federalism: how to prevent rivalry from spoiling the union’s productive potential. Federalism creates new platforms for political competition, and politicians may use the enhanced complexity of the decentralized structure