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Fiscal Decentralization and Government Size in Latin America

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Abstract

This paper explores the link between fiscal decentralization and government size in Latin America. While most related work attempts to test Brennan and Buchanan's "Liviathan" hypothesis, here the emphasis is placed on a different channel: the potential for decentralization to aggravate the common pool problem. In addition to the degree of expenditure decentralization, we consider the importance of vertical fiscal imbalance, as well as some institutional variables related to the nature of intergovernmental relations which can affect the ability of some jurisdictions to shift the cost of their local programs onto others: the degree to which intergovernmental transfers are discretional, and the degree to which subnational governments have borrowing autonomy. We find that decentralization tends to produce larger governments, but this effect is particularly important in cases where vertical imbalance is high, transfers are discretional and the degree of borrowing autonomy of subnational governments is large.

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Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

Volume (Year): II (1999)
Issue (Month): (November)
Pages: 357-391

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Handle: RePEc:cem:jaecon:v:2:y:1999:n:2:p:357-391

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Keywords: Decentralization; government expenditures; fiscal discipline;

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  1. Panizza, Ugo, 1999. "On the determinants of fiscal centralization: Theory and evidence," Journal of Public Economics, Elsevier, Elsevier, vol. 74(1), pages 97-139, October.
  2. von Hagen, Jurgen & Harden, Ian J., 1995. "Budget processes and commitment to fiscal discipline," European Economic Review, Elsevier, Elsevier, vol. 39(3-4), pages 771-779, April.
  3. Rodrik, Dani, 1996. "Why do More Open Economies Have Bigger Governments?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1388, C.E.P.R. Discussion Papers.
  4. Gene M. Grossman & Elhanan Helpman, 1992. "Protection For Sale," NBER Working Papers 4149, National Bureau of Economic Research, Inc.
  5. von Hagen, Jurgen & Eichengreen, Barry, 1996. "Federalism, Fiscal Restraints, and European Monetary Union," American Economic Review, American Economic Association, American Economic Association, vol. 86(2), pages 134-38, May.
  6. M M Barrow, 1986. "Central grants to local governments: a game theoretic approach," Environment and Planning C: Government and Policy, Pion Ltd, London, Pion Ltd, London, vol. 4(2), pages 155-164, April.
  7. Canzoneri, Matthew B. & Diba, Behzad T., 1991. "Fiscal deficits, financial integration, and a central bank for Europe," Journal of the Japanese and International Economies, Elsevier, Elsevier, vol. 5(4), pages 381-403, December.
  8. Philip Grossman, 1989. "Fiscal decentralization and government size: An extension," Public Choice, Springer, Springer, vol. 62(1), pages 63-69, July.
  9. Persson, Torsten & Tabellini, Guido, 1994. "Does centralization increase the size of government?," European Economic Review, Elsevier, Elsevier, vol. 38(3-4), pages 765-773, April.
  10. Weingast, Barry R & Shepsle, Kenneth A & Johnsen, Christopher, 1981. "The Political Economy of Benefits and Costs: A Neoclassical Approach to Distributive Politics," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(4), pages 642-64, August.
  11. David E. Wildasin, 2001. "Externalities and Bailouts: Hard and Soft Budget Constraints in Intergovernmental Fiscal Relations," Public Economics, EconWPA 0112002, EconWPA.
  12. Pablo Sanguinetti, 1994. "Intergovernmental transfers and public sector expenditures: a game-theoretic approach," Estudios de Economia, University of Chile, Department of Economics, University of Chile, Department of Economics, vol. 21(2 Year 19), pages 179-212, December.
  13. Forbes, Kevin F & Zampelli, Ernest M, 1989. "Is Leviathan a Mythical Beast?," American Economic Review, American Economic Association, American Economic Association, vol. 79(3), pages 568-77, June.
  14. Zax, Jeffrey S, 1989. "Is There a Leviathan in Your Neighborhood?," American Economic Review, American Economic Association, American Economic Association, vol. 79(3), pages 560-67, June.
  15. Oates, Wallace E, 1985. "Searching for Leviathan: An Empirical Study," American Economic Review, American Economic Association, American Economic Association, vol. 75(4), pages 748-57, September.
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