Munich Personal RePEc Archive

Fiscal decentralization and government size across Europe

Makreshanska, Suzana and Petrevski, Goran (2016): Fiscal decentralization and government size across Europe.

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The paper provides for an empirical study of the association between fiscal decentralization and government size on a panel of 28 European developed and former transition countries during 1991-2011, controlling for the effects of various demographic, institutional, and macroeconomic variables as well as for the effects of the Global Financial Crisis. The main findings from the empirical investigation are as follows: We provide evidence for non-negligible effects of expenditure decentralization on government size, especially in the former transition economies. However, when we employ the revenue decentralization as an explanatory variable we cannot provide support to the Leviathan hypothesis. We include two measures of the vertical fiscal imbalance and provide empirical support to the common-pool hypothesis only for the former transition countries. As for the effects of the control variables, our research results suggest that higher public debt leads to larger government, while trade openness is associated with smaller government size. Also, we find that the effects of population density and dependent population on government size differs between the developed and the former transition countries, while higher degree of urbanization reduces government size only in the developed countries sub-sample. Finally, we confirm that the Global Financial Crisis has strong effects on the level of government expenditure across Europe.

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