Government Size and Decentralization: Evidence from Disaggregated Data

Brennan and Buchanan (1977, 1980) model government as "Leviathan," a public entity that seeks to maximize its revenue. They offer the private monopoly corollary that competition among different fiscal units is an effective means of controlling the aggregate size of Leviathan. The resulting decentralization hypothesis states that total government intrusion into the economy should be smaller, other things being equal, the greater the extent to which taxes and expenditures are decentralized. This hypothesis is tested using a data set that covers all units of government. The data cover the 50 states for the years 1981 and 1984. By disaggregating federal spending on a state-by-state basis, a cross section of state data on federal, state, and local government activity is developed. The results provide support for the Brennan-Buchanan hypothesis that decentralization is one determinant of government size. The results suggest that the previous cross-sectional research failed to test the hypothesis on an appropriate measure of total government.