Do Local Governments Compete? - The Korea’s Case -

Abstract

Decentralization is argued to increase the efficiency of local expenditures. In relation to this controversy, it is important that competition among local governments produces efficient distribution of local governments. There are two hypotheses about the competition among local governments. The Leviathan and collusion hypotheses are tools that explains competition among local governments and its implication for local government size are best illustrated. The former explains that decentralization induces smaller government size by competition. The latter describes that the intergovernmental transfers make greater government sizes. This paper is trying to test both hypotheses to examine how the fiscal structure influences the local government size influenced by a degree of competition among themselves. The results show that the Leviathan and collusion hypotheses are accepted statistically. It can be support for the Leviathan hypothesis that competition between local governments contribute to decreases in local government size as measured by expenditure. And the collusion-inducing effect of intergovernmental transfers dominate the competition-inducing effect.