Fiscal decentralization, ideology, and the size of the public sector

No consensus has yet emerged on whether fiscal decentralization facilitates or impedes the growth of the public sector. One explanation for this ambiguity in the literature is that the effect of fiscal decentralization on public sector size depends on the government's ideology. This paper therefore develops a simple model to study theoretically how interactions between fiscal decentralization and the ideology of the government may influence the size of the public sector. Thereafter, the implications of the model are tested empirically with panel data from 18 OECD countries over the 1980-2000 period.

Research Highlights► This paper analyzes interactions between ideology and fiscal decentralization. ► It focuses the joint effect of these variables on public sector size. ► The analysis is conducted both theoretically and empirically. ► The empirical analysis suggests that decentralization increases public spending. ► But the increase is smaller under a right- than under a left-wing government.