New Working Paper in the IDEAGOV Working Paper Series

IDEAGOV is pleased to announce the publication of a new Working Paper entitled “Revenue Decentralization and Vertical Fiscal Imbalance: A Survey,” authored by Manuel E. Lago (Paris School of Economics), Santiago Lago-Peñas (Universidade de Santiago de Compostela), Jorge Martinez-Vazquez (Georgia State University) and Cristian Sepulveda (Farmingdale State College).

This paper offers a comprehensive and up-to-date survey of subnational revenue autonomy and vertical fiscal imbalances (VFI) in fiscally decentralized systems. It resumes how revenue decentralization is conceptualized, measured, and linked to fiscal and economic outcomes.

A central argument of the paper is that much of the empirical literature has been shaped—and sometimes distorted—by the use of transfer-based proxies to measure vertical fiscal imbalances. The authors show that failing to distinguish between optimal, actual, and excess VFI has led to inconsistencies in both theoretical and empirical findings.

The study highlights that revenue autonomy plays a key role in improving the performance of decentralized systems. In particular, higher levels of subnational revenue autonomy are associated with stronger accountability mechanisms, improved spending efficiency, and greater fiscal discipline.

At the same time, the paper emphasizes that excessive reliance on intergovernmental transfers can weaken incentives for local revenue mobilization and undermine the benefits of decentralization, especially when it leads to persistent “excess VFI.”

📄 The Working Paper is available at:https://www.ideagov.eu/wp