How Decentralization Has Affected the Size of Government

Penulis/Peneliti : Rosdiana Sijabat (PhD Student, Flinders University, Australia & Lecturer, Atma Jaya Catholic University of Indonesia).

Bidang Penelitian : Keuangan Publik

Jurnal :

Volume : ICONSEA 2009

Tahun : 2009

The purpose of this paper is to review the current knowledge in the fiscal federalism literatures on the relationship between fiscal decentralization and the size of government which based on three strands of literature. First, the Leviathan hypothesis by Brennan and Buchanan, argued that fiscal decentralization serves as a constraint on the behaviour of revenue- maximizing governments and thereby, reduce the overall size of government.

Second, the Wallis-Oates hypothesis that convinced fiscal decentralization increases the size of government since the delegation of expenditures is expected to increase the sub-national spending. The last is the Brennan and Buchanan Collusion hypothesis. They proposed that fiscal decentralization encourages collusive behaviour among levels of government and increases the size of government. Through collusion, sub-national government are able to increase their revenues and spending, beyond the level that would otherwise be attained in a competitive environment.

There have been numerous tests of the decentralization hypotheses which ended with mixed result. The results of these empirical studies are mixed due in part to the different ways in determining the variable of the government size and the measures of fiscal decentralization.

After investigating the burgeoning literature and researches concerning the relationship between fiscal decentralization and the size of government, this paper propose more firm measures of fiscal decentralization, not only as it is suggested by the theory, but also variables which are more fit based on local, regional and international country setting.


Keywords: Decentralization; Government revenue and Expenditure: Public Size.
JEL Classification: H3, H7, R5.