The Effects of Fiscal Decentralization on General and Local Government Size: Does Composite Index Matter?

Ebru Canikalp,İlter Ünlükaplan,Taner Turan

doi:10.24193/tras.64e.1

Ebru Canikalp, İlter Ünlükaplan + Show 1 more

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https://doi.org/10.24193/tras.64e.1

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Abstract

This article examines the impact of fiscal decentralization on the size of both general and local government using data for 36 countries over the period 1972–2019 and GMM. Our results consistently suggest that fiscal decentralization does not exert a significant impact on general government size. On the other hand, there exists a positive relationship between fiscal decentralization and local government size. We should note that our baseline regression results don’t significantly change when we use different fiscal decentralization indexes. Therefore, we don’t find any evidence for the argument that fiscal decentralization would be helpful to restrict the expansion of government size. Moreover, we present some evidence for the flypaper effect. Additionally, we find a positive relationship between the fiscal importance and local governments, interpreted as an indicator of expenditure competition instead of race to bottom.

Highlights

Fiscal decentralization is defined as the devolution of financial power and responsibilities from the central government to local governments (Neyaptı, 2005)
In the famous ‘Leviathan’ hypothesis developed by Brennan and Buchanan (1980), fiscal decentralization is proposed as a solution to limit the expansion of the public sector
Using Vo’s (2008) fiscal decentralization index for 36 countries and system General Method of Moments (GMM), we examine both Local Leviathan and Leviathan hypothesis

Summary

Introduction

Fiscal decentralization is defined as the devolution of financial power and responsibilities from the central government to local governments (Neyaptı, 2005). Josselin (1995) and Craw (2008) suggest that fiscal decentralization would exert a positive impact on local government size, called Local Leviathan in the literature. More empirical studies are deeply needed to shed light on the relationship between fiscal decentralization and government size at both general and local levels. Somewhat surprisingly, only a limited number of studies empirically examine the relationship between fiscal decentralization and local government size (Rodden, 2003; Kwon, 2003; Craw, 2008; Boetti, Piacenza and Turati, 2012; Liberati and Sacchi, 2013; Jia, Guo and Zhang, 2014).

Literature review

Data and model specification

Empirical results

Conclusion