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New Evidence on Fiscal Decentralization and the Size of Government

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  • Jon H. Fiva

Abstract

This paper adds to the literature by utilizing improved data on tax revenue decentralization to re-examine the relationship between fiscal decentralization and the size of government. An econometric analysis using panel data from 18 OECD countries shows that fiscal decentralization matters for both the size and composition of government spending. Tax revenue decentralization is associated with a smaller public sector, while expenditure decentralization is associated with a larger public sector. The former effect seems to be driven by a reduction in social security transfers, while the latter effect seems to be driven by increased government consumption.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2005/wp-cesifo-2005-12/cesifo1_wp1615.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1615.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1615

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Keywords: fiscal federalism; sub-central fiscal autonomy; government expenditures; size of government;

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References

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  1. Brennan,Geoffrey & Buchanan,James M., 2006. "The Power to Tax," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521027922.
  2. Lars P. Feld & Gebhard Kirchgaessner & Christoph A. Schaltegger, 2010. "Decentralized Taxation and the Size of Government: Evidence from Swiss State and Local Governments," Southern Economic Journal, Southern Economic Association, vol. 77(1), pages 27-48, July.
  3. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
  4. Dani Rodrik, 1997. "Has Globalization Gone Too Far?," Peterson Institute Press: All Books, Peterson Institute for International Economics, Peterson Institute for International Economics, number 57, July.
  5. Ernesto Stein, 1999. "Fiscal Decentralization and Government Size in Latin America," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 357-391, November.
  6. 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.
  7. Dani Rodrik, 1996. "Why Do More Open Economies Have Bigger Governments?," NBER Working Papers 5537, National Bureau of Economic Research, Inc.
  8. Fisman, Raymond & Gatti, Roberta, 2000. "Decentralization and corruption - evidence across countries," Policy Research Working Paper Series 2290, The World Bank.
  9. Sinn, Hans-Werner, 2004. "The new systems competition," Munich Reprints in Economics, University of Munich, Department of Economics 19608, University of Munich, Department of Economics.
  10. Jin, Jing & Zou, Heng-fu, 2002. "How does fiscal decentralization affect aggregate, national, and subnational government size?," Journal of Urban Economics, Elsevier, vol. 52(2), pages 270-293, September.
  11. Ebel, Robert D. & Yilmaz, Serdar, 2002. "On the measurement and impact of fiscal decentralization," Policy Research Working Paper Series 2809, The World Bank.
  12. Dan Stegarescu, 2005. "Public sector decentralisation: measurement concepts and recent international trends," Fiscal Studies, Institute for Fiscal Studies, vol. 26(3), pages 301-333, September.
  13. Rodden, Jonathan, 2003. "Reviving Leviathan: Fiscal Federalism and the Growth of Government," International Organization, Cambridge University Press, Cambridge University Press, vol. 57(04), pages 695-729, September.
  14. Keen, M. & Marchand, M., . "Fiscal competition and the pattern of public spending," CORE Discussion Papers RP -1284, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  15. Ehdaie, Jaber, 1994. "Fiscal decentralization and the size of the government : an extension with evidence from cross-country data," Policy Research Working Paper Series 1387, The World Bank.
  16. Philip Grossman, 1989. "Fiscal decentralization and government size: An extension," Public Choice, Springer, Springer, vol. 62(1), pages 63-69, July.
  17. Fiva, Jon H. & Rattso, Jorn, 2006. "Welfare competition in Norway: Norms and expenditures," European Journal of Political Economy, Elsevier, vol. 22(1), pages 202-222, March.
  18. John Anderson & Hendrik van den Berg, 1998. "Fiscal Decentralization and Government Size: An International Test for Leviathan Accounting for Unmeasured Economic Activity," International Tax and Public Finance, Springer, Springer, vol. 5(2), pages 171-186, May.
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Citations

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Cited by:
  1. Francoise Forges & Frédéric Koessler, 2006. "Long Persuasion Games," CESifo Working Paper Series 1669, CESifo Group Munich.
  2. Aurélie Cassette & Sonia Paty, 2010. "Fiscal decentralization and the size of government: a European country empirical analysis," Public Choice, Springer, Springer, vol. 143(1), pages 173-189, April.
  3. David Cantarero Prieto & Marta Pascual Saez, . "Decentralisation and health care outcomes: An empirical analysis within the European Union," Studies on the Spanish Economy 220, FEDEA.
  4. John Ashworth & Emma Galli & Fabio Padovano, 2013. "Decentralization as a constraint to Leviathan: a panel cointegration analysis," Public Choice, Springer, Springer, vol. 156(3), pages 491-516, September.
  5. Pierre Salmon, 2013. "Horizontal competition in multilevel governmental settings," Working Papers hal-00830876, HAL.
  6. Graeme Roy, 2006. "Grants Versus Tax Sharing: the Extent of Central Government Control," ERSA conference papers ersa06p74, European Regional Science Association.
  7. Jiménez-Rubio, Dolores, 2011. "The impact of fiscal decentralization on infant mortality rates: Evidence from OECD countries," Social Science & Medicine, Elsevier, Elsevier, vol. 73(9), pages 1401-1407.
  8. Niklas Potrafke, 2006. "Political Effects on the Allocation of Public Expenditures: Empirical Evidence from OECD Countries," Discussion Papers of DIW Berlin 653, DIW Berlin, German Institute for Economic Research.

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