This dissertation consists of two essays that examine the efficiency and equity implications of a particular fiscal decentralization system. Both essays have the Peruvian local governments as their unit of analysis.

The first essay investigates how accountability takes place in local governments in a decentralized context. Accountability can refer to different concepts. In this essay we focus on the effects of fiscal and policy variables on electoral outcomes. Theoretically, one of the benefits of decentralization is the higher accountability that arises when subnational governments are responsible for providing goods and services in their jurisdictions and when they finance those goods and services with their own revenues. It is expected that this framework will increase the interest of citizens in the performance of their elected authorities, as well as the concern of elected authorities in their performance motivated by their expectations of being reelected or being revoked.

The second essay examines the nature of fiscal disparities among local governments under a decentralized context and the role played by equalization transfers. One of the challenges in a decentralized context is to determine a transfer system with equity criteria; meaning giving support to those jurisdictions that have low fiscal capacity and higher expenditure needs, but without discouraging them to generate their own revenues or incur into excessive spending. An important task to deal with this challenge is finding the right measures of fiscal capacity and expenditure needs, and setting guidelines for how to include them in the transfer system formula. The effect of including fiscal capacity and expenditure needs measures in the design of equalization transfers could provide a strategy to reduce existing fiscal disparities. We propose an alternative allocation methodology that includes a measure of fiscal capacity in the current Peruvian equalization transfer and compare it with the current formula by identifying the changes in the disparities before and after the proposed reform.