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Does Decentralization Reduce Government Size? A Quantitative Study of the Decentralization Hypothesis


Author Info

  • Silika Prohl

    (Department of Economics, Swiss Banking Institute, University of Zurich, Zurich, Switzerland,

  • Friedrich Schneider

    (Department of Economics, Institute of Economic Policy, Johannes Kepler University of Linz, Linz Auhof, Austria)


The ‘‘decentralization hypothesis’’ in the theory of fiscal federalism suggests that fiscal decentralization may have a dampening effect on government size, implying that government intrusion into the economy can be restricted if government responsibilities for taxes and expenditures are decentralized. We study the effect of decentralization on public sector growth for a panel of twenty-nine countries over the 1978—2003 period. The major purposes of this study are twofold. First, we examine the decentralization hypothesis using two different proxy variables of fiscal decentralization: a measure of expenditure and revenue decentralization based on government financial statistics and an index of fiscal federalism that incorporates the fiscal and administrative autonomy that constitutional and statutory law grants to subnational governments. Second, and relatedly, we also explore the hypothesis that direct democracy at the local level has a dampening effect on government growth.

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Bibliographic Info

Article provided by in its journal Public Finance Review.

Volume (Year): 37 (2009)
Issue (Month): 6 (November)
Pages: 639-664

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Handle: RePEc:sae:pubfin:v:37:y:2009:i:6:p:639-664

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Keywords: size of government; fiscal federalism; panel data analysis;


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Cited by:
  1. Feld, Lars P., 2014. "James Buchanan's theory of federalism: From fiscal equity to the ideal political order," Freiburg Discussion Papers on Constitutional Economics 14/06, Walter Eucken Institut e.V..
  2. Jaroslaw Kantorowicz, 2014. "Judges as Fiscal Activists: Can Constitutional Review Shape Public Finance?," DANUBE: Law and Economics Review, European Association Comenius - EACO, issue 2, pages 79-104, June.
  3. Paolo Liberati & Agnese Sacchi, 2013. "Tax decentralization and local government size," Public Choice, Springer, Springer, vol. 157(1), pages 183-205, October.
  4. Jean-Paul Faguet & Fabio Sánchez, 2009. "Decentralization and Access to Social Services in Colombia," DOCUMENTOS CEDE, UNIVERSIDAD DE LOS ANDES-CEDE 005401, UNIVERSIDAD DE LOS ANDES-CEDE.


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