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Reviving Leviathan: Fiscal Federalism and the Growth of Government

  • Rodden, Jonathan
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    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.

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    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
    Contact details of provider: Postal: Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK
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    1. Dani Rodrik, 1998. "Why Do More Open Economies Have Bigger Governments?," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 997-1032, October.
    2. 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.
    3. Ernesto Stein, 1999. "Fiscal Decentralization and Government Size in Latin America," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 357-391, November.
    4. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
    5. Panizza, Ugo, 1999. "On the determinants of fiscal centralization: Theory and evidence," Journal of Public Economics, Elsevier, vol. 74(1), pages 97-139, October.
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    8. 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.
    9. P.J. Grossman & E. West, 1991. "Federalism and the Growth of Government Revisited," Economics Discussion / Working Papers 91-05, The University of Western Australia, Department of Economics.
    10. repec:tpr:qjecon:v:112:y:1997:i:4:p:1057-90 is not listed on IDEAS
    11. Barry Eichengreen & Jürgen Hagen, 1996. "Fiscal restrictions and monetary union: Rationales, repercussions, reforms," Empirica, Springer, vol. 23(1), pages 3-23, February.
    12. Philip Grossman, 1989. "Fiscal decentralization and government size: An extension," Public Choice, Springer, vol. 62(1), pages 63-69, July.
    13. 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.
    14. Bolton, Patrick & Roland, Gérard, 1995. "The Break up of Nations: A Political Economy Analysis," CEPR Discussion Papers 1225, C.E.P.R. Discussion Papers.
    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. Wallace E. Oates, 1991. "Studies In Fiscal Federalism," Books, Edward Elgar, number 342, April.
    17. Marlow, Michael L, 1991. " Privatization and Government Size," Public Choice, Springer, vol. 68(1-3), pages 273-76, January.
    18. 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, June.
    19. 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.
    20. 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.
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