Revisiting the nexus between fiscal decentralization and government size - The role of ethnic fragmentation

Atrayee Choudhury and Sohini Sahu

European Journal of Political Economy, 2022, vol. 75, issue C

Abstract: The extant literature on the relationship between fiscal decentralization and government size provides mixed evidence. In this paper, we use a panel of 65 developed and developing countries from 1972 to 2013 to analyse the role of ethnic fragmentation as a mediator in this relationship. Using FGLS for heterogeneous panels, system GMM and instrumental variable methods, we find that fiscal decentralization is inversely associated with government size, but the relationship is positive and significant when variation in ethnic fragmentation is considered. Our findings support the theory that the heterogeneous needs and preferences of an ethnically fragmented region lead to an increase in the demand for public goods and services provision, thereby increasing the level of aggregate government spending through fiscal decentralization. The results are robust across alternate definitions of fiscal decentralization, model specification, and estimation methods.

Keywords: Fiscal decentralization; Government size; Ethnic fragmentation (search for similar items in EconPapers)
JEL-codes: H11 H41 H72 Z13 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:poleco:v:75:y:2022:i:c:s0176268022000118

DOI: 10.1016/j.ejpoleco.2022.102193

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