Does Centralization Increase the Size of Government?

by

Torsten Persson and Guido Tabellini

Abstract

Are fiscal programs larger or smaller if they are run centrally, rather than locally, in a prospective federation. We abstract completely from well-understood economic issues and focus instead on the political effects of centralization. For fiscal programs with benefits broadly spread in the population - such as redistributive transfer schemes, social insurance and general government consumption - centralization changes the coalition of voters who favor a large program in a direction that depends on the nature of the redistributive instrument. For fiscal programs with localized benefits - such as provision of local public goods - centralisation creates opportunities for rent-seeking, which increases the size of government.

Keywords: fiscal federalism, constitutions, redistribution

JEL classification numbers: D70, E60, H10