# 1 Introduction

During the past two decades, a silent revolution has swept the globe and a large number of industrial and developing countries have pursued localization/decentralization reforms (see Boadway and Shah, 2009, Shah, 1998, for motivations for such a change). The reform agenda has been pursued through varying combinations of political, administrative and fiscal decentralization initiatives. These reforms have proven to be controversial. This is because localization is perceived both as a solution to problems, such as a dysfunctional public sector, lack of voice and exit, as well as a source of new problems, such as capture by local elite, aggravation of macroeconomic management due to lack of fiscal discipline and perverse fiscal behavior by sub-national units.

The impact of localization on corruption (defined as the abuse of public office for private gain or exercise of official powers against public interest) is an area of growing interest inviting much controversy and debate. However, the empirical literature on this subject is scant, and much of the discussion is grounded in selective anecdotal evidence at the micro or macro level. In this paper we use new cross-country data on decentralization and corruption to synthesize and strengthen the empirical foundations of this debate by trying to isolate the role of decentralized decision making in creating an enabling environment for an accountable public sector.

This paper represents a major departure from existing literature. The existing literature uses subnational governance as an indicator of decentralization. This is clearly indefensible as provinces and states in federal countries are typically larger than nation states in many unitary countries. Therefore simply shifting responsibilities to intermediate tier may not represent strengthened local decision making. This paper overcomes this problem by focusing on decentralized local governance and capturing its myriad dimensions- political, fiscal and administrative into composite indexes for a worldwide sample of 182 countries (see Ivanyna and Shah, 2010, for details on the underlying data and their aggregation).

The paper further utilizes improved measures on the incidence of corruption. We use three different datasets for this purpose, two of which have not been used before in similar studies. As a base measure of corruption we use Transparency International’s Corruption Perception Index, which is an aggregate index based on the opinion of country experts. Further, with the help of Global Corruption Barometer Survey, which is also conducted by the Transparency International, we measure corruption - its frequency and amount - at the household level for 71 countries with more than 55 thousands households covered. Our third dataset is the World Bank Enterprises Survey, which covers 99 countries, and provides micro-level data on corruption - both frequency and amount of bribery - for more than 80,000 firms in different industries. Therefore, our research on corruption and decentralization extends both to micro- and macro-level data, and encompasses both households and businesses.

The paper is organized as follows. Section 2 presents a brief review of conceptual and empirical literature. The dataset on decentralization is described in Section 3, and various measures of corruption, which we use in this paper, are presented in Section 7. This is followed by a discussion on empirical model and variables in 2