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Fiscal federalism, jurisdictional competition, and the size of government

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  • Jason Sorens

Abstract

Fiscal federalism is commonly held to reduce the size of government, but how does it do so: through shrinking the welfare state, cutting government consumption, or reducing public investment? This paper examines tax competition under fiscal federalism through the lens of imperfect competition theory, derives new empirical implications from different theories of fiscal federalism, and tests those hypotheses with new variables and data. Cross-national statistical results show that jurisdictional competition under fiscal federalism is associated with reductions in the administrative expense of government but not the size of the welfare state. Moreover, the apparent impact of fiscal federalism with a high degree of jurisdictional competition is larger than that estimated in previous research. Once the models have been appropriately specified, the United States is no longer an outlier among high-income democracies on either government consumption or social spending. Close examination of the data reveals that some fiscally federal systems better approximate a “market-preserving model” and others a “capital-privileging” or “state-corroding” model. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Jason Sorens, 2014. "Fiscal federalism, jurisdictional competition, and the size of government," Constitutional Political Economy, Springer, vol. 25(4), pages 354-375, December.
    • Handle: RePEc:kap:copoec:v:25:y:2014:i:4:p:354-375
    DOI: 10.1007/s10602-014-9164-0
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    Cited by:

    1. Aslim, Erkmen Giray & Neyapti, Bilin, 2017. "Optimal fiscal decentralization: Redistribution and welfare implications," Economic Modelling, Elsevier, vol. 61(C), pages 224-234.
    2. Jason P. Sorens, 2016. "Secession Risk and Fiscal Federalism," Publius: The Journal of Federalism, CSF Associates Inc., vol. 46(1), pages 25-50.
    3. Huping Shang & Hongmei Liu & Wei Liu, 2024. "Unveiling the origins of non-performance-oriented behavior in China’s local governments: a game theory perspective on the performance-based promotion system," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-11, December.

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    More about this item

    Keywords

    Political economy; Fiscal federalism; Decentralization; Government spending; H11; H77; P16;
    All these keywords.

    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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