On the Determinants of Fiscal Centralization: Theory and Evidence

Abstract

This paper presents a simple positive model that unifies most of the results of the normative literature on fiscal federalism. The model describes an economy characterized by two levels of government, one public good, and a private good. The predictions of the model are tested by using a new set of measures of fiscal centralization. The main findings are that country size, income per capita, ethnic fractionalization, and level of democracy are negatively correlated with the degree of fiscal centralization. The model is tested using OLS, Tobit, and semi-parametric estimators. The paper also shows that the set of variables included in the regression are helpful to predict changes in the level of centralization.

JEL Classification: D72, H11, H71, H77