Leviathan Hypothesis Testing for the Iranian Economy by Using Generalized Method of Moments (GMM)

According to the Brennan and Buchanan theory (1980), entitled Leviathan Hypothesis, fiscal decentralization can reduce the government size. In this context, this paper tries to reviewed the relationship between fiscal decentralization (from two perspectives: expenditure financial decentralization and revenue financial decentralization) and government size (from three perspectives: provincial (sub national) government, national government and aggregate governments) by using statistical and economic information for 30 provinces of Iran during the period 1996-2009. To the purposes have been used also of the control variables: GDP per capita, inflation and population growth rate. Finding this paper in dynamic panel models and by using generalized method of moments (GMM) shows that the effect of expenditure fiscal decentralization on the provincial, national and aggregate government size is respectively positive, meaningless and positive and effect of revenue fiscal decentralization on the provincial, national and aggregate government size is respectively positive, negative and positive. Also, estimation results the control variables of parameter indicate a positive and significant influence on the government size of GDP per capita (verified Wagner’s law in Iranian economy), inflation and population growth rate.