Fiscal federalism, local public works and corruption ¤ Martin Besfamille y First Draft: June 1997 This version: March 2000 ¤ I thank B. Jullien for his pertinent advice and his continuous encouragement. I am par- ticularly indebted to the comments of M. Braun, D. P¶erez-Castrillo, P. Seabright, B. Sinclair- Desgagn¶e, Y. Spiegel and J. Tirole. Valuable contributions were made by participants of the 8th GREQAM-CORE Spring School of Economics (Aix, 1999), the 12th World Congress of the International Economic Association (Buenos Aires, 1999) and seminars at CORE, Universidad Di Tella, CEMA, Universidad de San Andr¶es and Universit¶e de Liμege. Finally I appreciated useful discussions with A. Pavan. Of course, all errors remain my own. y CREPP, Universit¶e de Liμege, Bld. du Rectorat, 7 (B^ at . 31), 4000 Liμege, Belgium. Tel: [32](4) 366-3112 / Fax: [32](4) 366-3106 / E-mail: M.Besfamille@ulg.ac.be 1