Fiscal Decentralization and Government Size in Latin America

Journal of Applied Economics, Vol. II, No. 2, pp. 357-391, November 1999

Posted: 10 Jun 2004

See all articles by Ernesto Stein

Ernesto Stein

Inter-American Development Bank (IDB)

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This paper explores the link between fiscal decentralization and government size in Latin America. While most related work attempts to test Brennan and Buchanan's Liviathan hypothesis, here the emphasis is placed on a different channel: the potential for decentralization to aggravate the common pool problem. In addition to the degree of expenditure decentralization, we consider the importance of vertical fiscal imbalance, as well as some institutional variables related to the nature of intergovernmental relations which can affect the ability of some jurisdictions to shift the cost of their local programs onto others: the degree to which intergovernmental transfers are discretional, and the degree to which subnational governments have borrowing autonomy. We find that decentralization tends to produce larger governments, but this effect is particularly important in cases where vertical imbalance is high, transfers are discretional and the degree of borrowing autonomy of subnational governments is large.

Keywords: Decentralization, government expenditures, fiscal discipline

JEL Classification: H77, H70, E62

Suggested Citation

Stein, Ernesto Hugo, Fiscal Decentralization and Government Size in Latin America. Journal of Applied Economics, Vol. II, No. 2, pp. 357-391, November 1999, Available at SSRN:

Ernesto Hugo Stein (Contact Author)

Inter-American Development Bank (IDB) ( email )

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