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Reviving Leviathan: Fiscal Federalism and the Growth of Government

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  • Rodden, Jonathan
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    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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    Bibliographic Info

    Article provided by Cambridge University Press in its journal International Organization.

    Volume (Year): 57 (2003)
    Issue (Month): 04 (September)
    Pages: 695-729

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    Handle: RePEc:cup:intorg:v:57:y:2003:i:04:p:695-729_57

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    1. Bolton, Patrick & Roland, Gerard, 1997. "The Breakup of Nations: A Political Economy Analysis," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1057-90, November.
    2. Panizza, Ugo, 1999. "On the determinants of fiscal centralization: Theory and evidence," Journal of Public Economics, Elsevier, vol. 74(1), pages 97-139, October.
    3. Rodrik, Dani, 1996. "Why do More Open Economies Have Bigger Governments?," CEPR Discussion Papers 1388, C.E.P.R. Discussion Papers.
    4. Grossman, Philip J & West, Edwin G, 1994. " Federalism and the Growth of Government Revisited," Public Choice, Springer, vol. 79(1-2), pages 19-32, April.
    5. Lars-Erik Borge & Jørn Rattsø, 2002. "Spending Growth With Vertical Fiscal Imbalance: Decentralized Government Spending In Norway, 1880-1990," Economics and Politics, Wiley Blackwell, vol. 14(3), pages 351-373, November.
    6. Ernesto Stein, 1999. "Fiscal Decentralization and Government Size in Latin America," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 357-391, November.
    7. Philip Grossman, 1989. "Fiscal decentralization and government size: An extension," Public Choice, Springer, vol. 62(1), pages 63-69, July.
    8. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
    9. Michael Marlow, 1988. "Fiscal decentralization and government size," Public Choice, Springer, vol. 56(3), pages 259-269, March.
    10. Barry Eichengreen & Jürgen Hagen, 1996. "Fiscal restrictions and monetary union: Rationales, repercussions, reforms," Empirica, Springer, vol. 23(1), pages 3-23, February.
    11. Meltzer, Allan H & Richard, Scott F, 1981. "A Rational Theory of the Size of Government," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 914-27, October.
    12. Marlow, Michael L, 1991. " Privatization and Government Size," Public Choice, Springer, vol. 68(1-3), pages 273-76, January.
    13. Bradford, David F & Oates, Wallace E, 1971. "Towards a Predictive Theory of Intergovernmental Grants," American Economic Review, American Economic Association, vol. 61(2), pages 440-48, May.
    14. Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May.
    15. Persson, Torsten & Tabellini, Guido, 1994. "Does centralization increase the size of government?," European Economic Review, Elsevier, vol. 38(3-4), pages 765-773, April.
    16. James M. Buchanan & Richard A. Musgrave, 1999. "Public Finance and Public Choice: Two Contrasting Visions of the State," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262024624, December.
    17. Dilip Mookherjee & Pranab K. Bardhan, 2000. "Capture and Governance at Local and National Levels," American Economic Review, American Economic Association, vol. 90(2), pages 135-139, May.
    18. Winer, Stanley L, 1983. "Some Evidence on the Effect of the Separation of Spending and Taxing Decisions," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 126-40, February.
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