Searching for Leviathan: Comment and Extension

TLDR

Fiscal decentralization is theorized to constrain public sector size by fostering competition among subnational units, a view advanced by Oates, Musgrave, Brennan & Buchanan, and Hettich & Winer. The paper aims to reexamine Oates's analysis for state and local governments. The authors argue that Oates's decentralization metrics are unsuitable and propose incorporating jurisdictional structure to better test the hypothesis. Oates's analysis of U.S. state/local data and 43 countries yielded little evidence for the decentralization hypothesis.

Abstract

In a recent article, Wallace Oates (1985) investigated whether fiscal decentralization tended to act as a constraining influence on the overall size of the public sector. This hypothesis has been advanced by several alternative theories of government behavior including Richard Musgrave's (1959) model of how the distribution function of government would be carried out by subnational governments, Geoffrey Brennan and James Buchanan's (1980) Leviathan model, and the more traditional public choice model (for example, Walter Hettich and Stanley Winer, 1984). All contend that the decentralization of tax and spending decisions introduces competition among governmental units seeking to attract citizens and other mobile resources, and thereby constrains taxing power. Oates analyzed two data sets, one pertaining to the state and local sector in the United States and the other consisting of a sample of 43 countries, and found little empirical support for the decentralization hypothesis. The purpose of this paper is to reconsider his analysis in the case of state and local governments. Specifically, it will be argued that Oates's measures of decentralization may be inappropriate to test the hypothesis. Furthermore, by taking into account the structure or composition of local governmental jurisdictions within a state, empirical support of the decentralization hypothesis can be marshaled for general-purpose local governments such as counties and municipalities. I. Measuring Fiscal Decentralization Among the States