Fiscal decentralization and government size: The role of democracy.

This paper examines how the level of democracy in a country affects the relationship between fiscal decentralization and government size. We argue that political regimes, proxied by their democracy levels, are important for different decentralization theories to predict the impact of fiscal decentralization on government size. We test this argument using panel data from 76 developed and developing countries during 1972–2013. We find strong and robust evidence that fiscal decentralization is negatively associated with government size and that a higher level of democracy tends to mitigate the negative impact of fiscal decentralization. Therefore, our study contributes to the literature by offering a novel insight on mixed results regarding the relationship between fiscal decentralization and government size in the literature. • We re-examine empirically the effect of fiscal decentralization on government size. • We highlight the role of political regimes, proxied by democracy. • We use a panel dataset covering 76 developed and developing countries over the years 1972–2013 to conduct empirical analysis. • We find strong evidence that fiscal decentralization is negatively associated with government size. • We find that a higher level of democracy tends to mitigate the negative impact of fiscal decentralization. [ABSTRACT FROM AUTHOR]