An Empirical Analysis of the Relationship between Fiscal Decentralization and the Size of Government

The goal of this paper is to investigate the relationship between fiscal decentralization and the size of government. Using a pooled mean group estimator, which has rarely been applied in this context, we analyze a set of 23 OECD countries over the period 1970–2008. In contrast to previous studies we use an improved measure of fiscal decentralization, which effectively quantifies the degree of sub-national autonomy. Our results suggest that, in the long run, fiscal decentralization decreases the size of government.