Can Fiscal Decentralization Reduce the Public Sector Size in Europe: An Empirical Study
Can Fiscal Decentralization Reduce the Public Sector Size in Europe: An Empirical Study

Author(s): Silvia Golem, Ivana Žegarac
Subject(s): Social Sciences, Economy
Published by: Udruženje ekonomista i menadžera Balkana
Keywords: Leviathan hypothesis; Sub-national governments; European countries
Summary/Abstract: The main aim of this paper is to test the Leviathan hypothesis; namely, that fiscal decentralization reduces the size of public sector, using panel data analysis, and employing data for twenty European countries over the period 1999-2016. The Leviathan hypothesis suggests a negative relationship between the public sector size and fiscal decentralization. In the empirical literature, however, there is no clear consensus on whether fiscal decentralization actually reduces the public sector size. Some authors suggest that the effects of fiscal decentralization are quite the opposite - given that the sub-national authorities are better informed about their citizens’ preferences, the decentralized provision of public goods might be more efficient and better tailored to the citizens’ preferences, which can actually increase the local demand for public services, and hence, the size of the public sector. This research finds no evidence that fiscal decentralization has any effect on the size of the government.

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