Political Institutions and Income Inequality: The Case of Decentralization

Political power is being reallocated across territorial boundaries. Traditionally centralized polities are either decentralized or on their way to decentralization. In addition, European nations are engaged in the process of building a common set of rules both respectful to and compatible with their own peculiarities. As a result, the number of political entities in which several levels of government share a common economic space has increased. This paper analyzes how decentralization interacts with the politics of redistribution and inequality. The argument can be outlined as follows. Contrary to what is conventionally argued, decentralization per se does not necessarily lead towards higher (or lower) levels of income inequality. Whatever the impact of decentralization on the distribution of income may be, it is to a large extent a function of the internal structures of inequality within regions and their combination. Secondly, if decentralization indeed leads to different distributive outcomes, there are reasons to believe that, in the context of multilevel governance, contentions about the institutional design of redistribution are themselves contentions about who gets what. Such contentions make decentralization endogenous to the territorial structure of inequality by virtue of a political process linking the latter to the preferences about the institutional design of redistribution. The first part of the paper formalizes this argument. The second one tests its main implications against a data set of 15 OECD countries over the period 1980- 1997.