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Constitutional Political Economy

, Volume 25, Issue 4, pp 354–375 | Cite as

Fiscal federalism, jurisdictional competition, and the size of government

  • Jason SorensEmail author
Original Paper

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.

Keywords

Political economy Fiscal federalism Decentralization Government spending 

JEL Classification

H11 H77 P16 

Supplementary material

10602_2014_9164_MOESM1_ESM.pdf (98 kb)
Supplementary material 1 (pdf 97 KB)

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Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.Department of Government HB 6108Dartmouth CollegeHanoverUSA

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