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Reviving Leviathan: Fiscal Federalism and the Growth of Government

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Author Info
Rodden, Jonathan
Abstract

This article revisits the influential Leviathan hypothesis, which posits that tax competition limits the growth of government spending in decentralized countries. I use panel data to examine the effect of fiscal decentralization over time within countries, attempting to distinguish between decentralization that is funded by intergovernmental transfers and local taxation. First, I explore the logic whereby decentralization should restrict government spending if state and local governments have wide-ranging authority to set the tax base and rate, especially on mobile assets. In countries where this is most clearly the case, decentralization is associated with smaller government. Second, consistent with theoretical arguments drawn from welfare economics and positive political economy, I show that governments grow faster as they fund a greater portion of public expenditures through intergovernmental transfers.The author wishes to thank Jim Alt, Jeff Frieden, Michael Hiscox, Per Pettersson-Lindbom, Antonio Rangel, Karen Remmer, Susan Rose-Ackerman, Anwar Shah, Ken Shepsle, Romain Wacziarg, Barry Weingast, Erik Wibbels, Justin Wolfers, and seminar participants at Harvard, Stanford, Texas A M, the University of Washington, and the World Bank for helpful comments.

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File URL: http://journals.cambridge.org/abstract_S0020818303574021
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Publisher Info
Article provided by Cambridge University Press in its journal International Organization.

Volume (Year): 57 (2003)
Issue (Month): 04 (November)
Pages: 695-729
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:cup:intorg:v:57:y:2003:i:04:p:695-729_57

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  1. Graeme Roy, 2006. "Grants Versus Tax Sharing: the Extent of Central Government Control," ERSA conference papers ersa06p74, European Regional Science Association. [Downloadable!]
  2. Jon H. Fiva, 2005. "New Evidence on Fiscal Decentralization and the Size of Government," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  3. Lars Feld & Gebhard Kirchgaessner & Christoph A. Schaltegger, 2003. "Decentralized Taxation and the Size of Government: Evidence from Swiss State and Local Governments," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  4. Julia Darby & Anton Muscatelli & Graeme Roy, 2004. "Fiscal Federalism, Fiscal Consolidations and Cuts in Central Government Grants: Evidence from an Event Study," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  5. Wallace Oates, 2005. "Toward A Second-Generation Theory of Fiscal Federalism," International Tax and Public Finance, Springer, vol. 12(4), pages 349-373, August. [Downloadable!] (restricted)
  6. Lars P. Feld & Gebhard Kirchgässner, 2004. "Sustainable Fiscal Policy in a Federal System: Switzerland as an Example," Marburg Working Papers on Economics 200424, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung). [Downloadable!]
    Other versions:
  7. Jorge Martinez-Vazquez & Andrey Timofeev, 2008. "Fiscal Perspective of State Rescaling," International Studies Program Working Paper Series, at AYSPS, GSU paper0806, International Studies Program, Andrew Young School of Policy Studies, Georgia State University. [Downloadable!]
    Other versions:
  8. Plachta, Robert, 2008. "Fiscal Equalisation and the Soft Budget Constraint," FiFo-CPE Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge 08-8, University of Cologne, CPE - Cologne Center for Public Economics. [Downloadable!]
  9. Plata, Mar de, 2009. "Reunión Comisión de Descentralización y Autonomía Local Congreso FLACMA
    [Reunion Committee on Decentralization and Local Autonomy]    ," MPRA Paper 16563, University Library of Munich, Germany. [Downloadable!]
  10. Francesco Lagona & Fabio Padovano, 2007. "A nonlinear principal component analysis of the relationship between budget rules and fiscal performance in the European Union," Public Choice, Springer, vol. 130(3), pages 401-436, March. [Downloadable!] (restricted)
  11. Dolores Jimenez & Peter C Smith, . "Decentralisation of health care and its impact on health outcomes," Discussion Papers 05/10, Department of Economics, University of York. [Downloadable!]
  12. Julia Darby & Anton Muscatelli & Graeme Roy, 2006. "Asymmetries in the Responses of Sub-Central Governments to Changes in Grants: Evidence From an Event Study," ERSA conference papers ersa06p508, European Regional Science Association. [Downloadable!]
  13. Hills, Roderick, 2009. "Federalism and Public Choice," MPRA Paper 13625, University Library of Munich, Germany. [Downloadable!]
  14. Zhu, Z. & Krug, B., 2005. "Is China a Leviathan?," Research Paper ERS-2005-087-ORG Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
  15. Julia Darby & V. Anton Muscatelli & Graeme Roy, . "How do Sub-Central Government react to cuts in grants received from Central Governments Evidence from a Panel of 15 OECD Countries," Working Papers 2005_18, Department of Economics, University of Glasgow, revised Jun 2005. [Downloadable!]
  16. Laurent Bouton & Marjorie Gassner & Vincenzo Verardi, 2005. "The Tragedy of the Commons or the Curse of Federalism," Public Economics 0511013, EconWPA. [Downloadable!]
  17. Jørn Rattsø & Jon Hernes Fiva, 2005. "Decentralization with Property Taxation to Improve Incentives: Evidence from Local Governments’ Discrete Choice," Working Paper Series 5305, Department of Economics, Norwegian University of Science and Technology, revised 02 Sep 2005. [Downloadable!]
  18. Zhu, Z. & Krug, B., 2005. "Is China a Leviathan?," Research Paper ERS-2004-103-ORG Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
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