Fiscal Federalism, Collusion, and Government Size: Evidence from the States

Abstract

This study uses a state-level panel data set (1979-1992), encompassing all levels of government, to test the applicability of three theories concerning government size-the Wallis and Brennan/Buchanan versions of the decentralization hypothesis and the Brennan/Buchanan collusion hypothesis-to determine which one or ones should be used when modeling the public sector in the United States. The results indicate that as fiscal decentralization increases, state and local public expenditures increase and federal government expenditures decrease, as theorized by Wallis, whereas total government spending decreases, as predicted by Brennan and Buchanan. It is also shown that collusion among the different levels of government leads to an increase in overall government spending and an increase in spending at each individual level of government-evidence supporting the Brennan/Buchanan collusion hypothesis. Thus, this study shows that collusion among the different levels of government weakens the disciplining power of fiscal federalism. Therefore, fiscal decentralization alone may not act as a binding constraint on Leviathan type governments. Accordingly, it is concluded that each theory contributes to the explanation of public sector size, implying that each should be taken into consideration when modeling the public sector in the United States.