Fiscal Decentralization and Local Government Size: Evidence from Indonesia

Abstract

The aim of this study is to examine the association of fiscal decentralization in relation to government size in Indonesia. Literature theory of leviathan model argued that government behavior tends to maximize their revenue and expand their spending (government size). The constitutional way to hamper this behavior is limitation access of central government to revenue and giving revenue authorization to sub national government. Panel data of 33 provinces in Indonesia are deployed to examine the association of fiscal decentralization and government size. Proxies of fiscal decentralization are, local tax revenue, usher charge, decentralization revenue and government transfer. The empirical evidence in this study support previous study of leviathan hypothesis that fiscal decentralization tend to decrease government size.

Keywords: fiscal decentralization, government size, leviathan hypothesis.