Fiscal decentralization and government size: An extension

Abstract

This paper analyzes one method governments employ to circumvent the discipline of a competitive system of fiscal federalism -intergovernmental collusion in the form of intergovernmental grants. Grants, it is argued, serve to encourage the expansion of the public sector by concentrating taxing powers in the hands of the central government and by weakening the fiscal discipline imposed on governments forced to self-finance their expenditures. The results reported suggest that intergovernmental grants do encourage growth in the public sector. The results offer further support for the use of monopoly government assumptions in public sector modeling.

Fiscal Decentralization - A Survey of the Empirical Literature

“…They also find that revenue decentralization leads to smaller aggregate governments, and that vertical fiscal imbalances tend to increase the sizes of subnational, national, and aggregate governments. Fiva (2006) finds similar results, and the government enlarging effect of IGGs is in line with Grossman (1989).…”

Decentralization as a constraint to Leviathan: a panel cointegration analysis

“…Agreements between sub-central and central government about revenue sharing programs are an obvious and frequent form of collusion. Grossman (1989), Ehdaie (1994) and Persson and Tabellini (1994) point out a variety of ways in which sub-central governments use revenue-sharing schemes to trade between lowers power to tax and reduced political costs of spending decisions. Revenue-sharing programs de facto blur the responsibility for spending decisions by a) dispersing among a potentially large number of levels of governments; b) increasing situations of common pool, which make it more likely for sub-central governments to impose the political and economic costs of their spending decisions on residents outside their jurisdiction.…”

Determinants of government size: evidence from China

“…2 Brennan and Buchanan (1980: 183) note that "revenue sharing is undesirable, because it subverts the primary purpose of federalism, which is to create competition between jurisdictions." Empirical evidence indicates that the collusion hypothesis holds true in many countries (Chen 2004;Ehdaie 1994;Grossman 1989;Stein 1998;Zhu and Krug 2005).…”