Local income inequality, rent-seeking detection, and equalization: a laboratory experiment

Recent empirical literature studied the correlation between fiscal disparities and corruption, assuming that corruption is responsible for variations in tax bases (incomes), but few studies test whether local fiscal disparities may be responsible for variations in the level of corruption. Through a laboratory experiment, this paper aims to investigate the effect of fiscal disparities on local administrators’ corruption detection by local voters, and the effect of simple or complex equalization formulas on corruption detection. We provide clear experimental evidence of an inverse correlation between fiscal disparity and corruption detection, and a positive effect of fiscal equalization on citizens’ ability to detect corruption, the last depending on the equalization formula adopted. We demonstrate that equalization may be useful to improve the process by which subnational voters evaluate potentially corrupt governments and that the simple equalization formula, namely revenue equalization, is more effective than the complex one, namely full equalization of fiscal capacities and costs of provision of local public goods.