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

6th International Scientific Conference – EMAN 2022 – Economics and Management: How to Cope With Disrupted Times, Ljubljana, Slovenia, March 24, 2022, CONFERENCE PROCEEDINGS, published by: Association of Economists and Managers of the Balkans, Belgrade, Serbia; ISBN 978-86-80194-57-8, ISSN 2683-4510

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.

Keywords:

Leviathan hypothesis; Sub-national governments; European countries

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