Determination of an Absorption-Based Revenue Sharing Formula and Its Implications on Corruption Perception in Kenya
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Date
2025-11
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Kenyatta University
Abstract
Kenya's devolved governance system faces systematic under-utilization of allocated resources,
with county governments achieving only 16% absorption of development budgets and
accumulating Kes 180.52 billion in pending bills, indicating fundamental misalignment between
current revenue-sharing formulas and county absorption capacities that has persisted across three
formula generations since 2013. The study aimed to develop an absorption-based revenue-sharing
formula incorporating all devolved functions, quantify excess revenue created by existing
allocation mechanisms, and examine the relationship between excess allocations and county
corruption perceptions. Using panel data analysis for all 47 counties from FY 2013/14 to 2020/21,
the research employed constrained regression methodology anchored on Second-Generation Fiscal
Federalism Theory and Absorption Capacity Theory, measuring county capacity through
expenditure patterns across eight devolved functions with correlation analysis examining
governance implications. For the first objective, the empirically-derived absorption-based formula
identified water services as the most critical determinant (coefficient = 29.12, p < 0.001), followed
by youth services (coefficient = 15.40, p < 0.001) and health services (coefficient = 13.73, p <
0.001), with education (coefficient = 10.75, p < 0.01), trade development (coefficient = 9.33, p <
0.05), environmental conservation (coefficient = 7.38, p < 0.05), agriculture (coefficient = 7.26, p
= 0.065), and housing (coefficient = 7.03, p = 0.09) also contributing significantly. For the second
objective, analysis revealed that 32 counties received KES 60.638 billion above their demonstrated
absorption capacity, representing 25% of total allocations, with individual excess ranging from
KES 59.87 million (Bomet) to KES 4,307.25 million (Wajir), compared to projected sharable
revenue of KES 178 billion versus actual allocations of KES 238.65 billion. For the third objective,
correlation analysis showed a weak negative relationship (-12.46%, p < 0.1) between excess
revenue and corruption perceptions, suggesting governance quality moderates resource-corruption
dynamics more than absolute resource levels. The study concludes that current allocation
mechanisms systematically create resource misalignments representing fiscal inefficiency rather
than temporary capacity constraints, with absorption-based formulas offering superior efficiency
by aligning incentives with demonstrated capacity across all functional areas. The Commission on
Revenue Allocation should adopt the empirically-derived absorption-based formula through
phased three-year implementation, establish comprehensive county capacity building programs
targeting water services, youth development, and health systems as priority areas, and implement
Description
A Project Submitted to the School of Business, Economic and Tourism in Partial Fulfillment of the Requirement for the Award of the Degree of
Master of Economics of Kenyatta University. November, 2025
supervisor
Mdoe Idi Jackson