On the determinants of fiscal centralization: Theory and evidence

This paper presents a simple model that unifies most of the results of the 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 variables included in the regression are helpful in the prediction of changes in the level of centralization. (C) 1999 Elsevier Science S.A. All rights reserved.