Local Governments and Economic Freedom: A Test of the Leviathan Hypothesis

39 Pages Posted: 21 Sep 2017

See all articles by Adam Millsap

Adam Millsap

Florida State University - Department of Economics; George Mason University - Mercatus Center

Bradley K. Hobbs

Florida Gulf Coast University

Dean Stansel

Southern Methodist University (SMU) - Edwin L. Cox School of Business

Date Written: September 19, 2017

Abstract

Geoffrey Brennan and James M. Buchanan, in their 1980 book The Power to Tax, hypothesize that “the potential for fiscal exploitation varies inversely with the number of competing governmental units in the inclusive territory.” This paper tests that theory at the local level using data for US metropolitan statistical areas (MSA). MSAs are constructed on the basis of commuting patterns and are meant to delineate the local economy. Because of their construction, MSAs typically contain several distinct and nonoverlapping political jurisdictions, each with the power to tax residents, mitigate local externalities, and provide local public goods. Following previous literature, we measure “competing governmental units” using the number of general-purpose local governments within an MSA, adjusted for land area and population. In contrast to previous work, which uses less comprehensive measures of “fiscal exploitation,” we test Brennan and Buchanan’s “Leviathan hypothesis” using various measures of MSA economic freedom, rather than more limited measures of spending or revenue, as our dependent variable. We find mixed evidence that the number of competing jurisdictions is positively associated with economic freedom. When examining the individual components of economic freedom, we find a positive and statistically significant relationship with labor market freedom but only a weak relationship with government spending or taxes. These results offer mixed support for the Leviathan hypothesis, though support strengthens when metro areas in the South are excluded.

Keywords: federalism, local taxation, decentralization, regional migration, economic freedom

JEL Classification: H77, H71, R23

Suggested Citation

Millsap, Adam and Hobbs, Bradley K. and Stansel, Dean, Local Governments and Economic Freedom: A Test of the Leviathan Hypothesis (September 19, 2017). Mercatus Research Paper 2017. Available at SSRN: https://ssrn.com/abstract=3039554 or http://dx.doi.org/10.2139/ssrn.3039554

Adam Millsap (Contact Author)

Florida State University - Department of Economics ( email )

288 Bellamy Building
Tallahassee, FL 30306-2180
United States

George Mason University - Mercatus Center ( email )

3434 Washington Blvd., 4th Floor
Arlington, VA 22201
United States

Bradley K. Hobbs

Florida Gulf Coast University ( email )

10501 FGCU Blvd. South
Ft. Myers, FL 33965-6565
United States

HOME PAGE: http://itech.fgcu.edu/faculty/bhobbs/

Dean Stansel

Southern Methodist University (SMU) - Edwin L. Cox School of Business ( email )

P.O. Box 750333
Dallas, TX 75275-0333
United States

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