Fiscal decentralization, democracy and government size: Disentangling the complexities

Abstract

This paper examines the mediating effect of democracy in explaining the relationship between decentralization and government size for the period 1970–2013. We proxy decentralization by fiscal decentralization, use total spending as our primary measure of government size and adopt the V-Dem high-level democracy indices as measures of democracy. Our main finding is that the relationship between fiscal decentralization and government spending differs under different types of democracy. From the interaction term, the negative effect of fiscal decentralization diminishes as the democracy level gets higher, particularly for participatory democracy irrespective of whether government size is measured by spending-to-GDP or employment.