Government size and decentralization: Evidence from disaggregated data
D Joulfaian, ML Marlow - Southern Economic Journal, 1990 - JSTOR
Southern Economic Journal, 1990•JSTOR
Public choice models of government behavior draw heavily from the economics literature of
industrial organization. Following the argument that private monopoly in production leads to
relatively high prices and profits, the public choice literature suggests that similar analysis of
government structure may be useful in the modeling of public production. Brennan and
Buchanan [3; 4] model government as" Leviathan"-a public entity which seeks to maximize
its revenue. The Leviathan hypothesis is motivated by the desire to success-fully understand …
industrial organization. Following the argument that private monopoly in production leads to
relatively high prices and profits, the public choice literature suggests that similar analysis of
government structure may be useful in the modeling of public production. Brennan and
Buchanan [3; 4] model government as" Leviathan"-a public entity which seeks to maximize
its revenue. The Leviathan hypothesis is motivated by the desire to success-fully understand …
Public choice models of government behavior draw heavily from the economics literature of industrial organization. Following the argument that private monopoly in production leads to relatively high prices and profits, the public choice literature suggests that similar analysis of government structure may be useful in the modeling of public production. Brennan and Buchanan [3; 4] model government as" Leviathan"-a public entity which seeks to maximize its revenue. The Leviathan hypothesis is motivated by the desire to success-fully understand government behavior as well as to recommend effective means of controlling its behavior. Among other suggestions, Brennan and Buchanan offer the private monopoly corollary that competition among different fiscal units is an effective means of controlling the aggregate size of Leviathan. The resulting decentralization hypothesis is:" total government intrusion into the economy should be smaller, ceteris paribus, the greater the extent to which taxes and expenditures are decentralized"[3, 15].
This paper tests the decentralization hypothesis by examining a data set which considers all units of government. By disaggregating Federal spending on a state-by-state basis, we construct a cross-section of state data on Federal, state and local government activity. All previous examina-tions of the decentralization hypothesis at the level of the state have excluded the activity of the Federal government. However, given that Federal government expenditures greatly exceed those of state and local governments, previous cross-sectional tests of the decentralization hypothesis may have employed grossly incomplete measures of governmental activity in each state. Our study provides two extensions to the debate. One, by testing the decentralization hypothesis at the level of state aggregation, we suggest that previous cross-sectional studies do not report strong evidence in support of the hypothesis because of their exclusion of the Federal sector. Two, our study suggests the importance of including all potential competitors in the government arena: state, local and Federal governments. Our study does not solve all issues concerning aggregation
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