The Effects of Fiscal Decentralization on General and Local Government Size: Does Composite Index Matter?

Abstract

This article examines the impact of fiscal decentralization on the size of both general and local government using data for 36 countries over the period 1972–2019 and GMM. Our results consistently suggest that fiscal decentralization does not exert a significant impact on general government size. On the other hand, there exists a positive relationship between fiscal decentralization and local government size. We should note that our baseline regression results don’t significantly change when we use different fiscal decentralization indexes. Therefore, we don’t find any evidence for the argument that fiscal decentralization would be helpful to restrict the expansion of government size. Moreover, we present some evidence for the flypaper effect. Additionally, we find a positive relationship between the fiscal importance and local governments, interpreted as an indicator of expenditure competition instead of race to bottom.