The Role of Governmental Organizational Form in Economic Growth

In the economic growth literature there have been numerous theoretical and empirical studies that examined a multitude of potential factors and policies affecting economic growth, primarily public policies such as infrastructure, education, and taxes. While we have some understanding of how these public policies affect economic growth prospects, we do not have a solid understanding of how different governmental organizational forms affect public policies and, ultimately, economic growth in the long run. The philosophical debate on how to best organize government units to encourage economic growth, a centralized versus a decentralized form of government, is long standing. More recently, the debate over the benefits and costs of a fragmented system of government has re-ignited this historical debate. While there have been great theoretical arguments both in favor of and against government fragmentation, there have been no real sophisticated empirical tests on the effects of different governmental organizational forms on economic growth. This dissertation seeks to address this shortcoming. In particular, this dissertation seeks to provide answers on whether a governmental organizational form encouraging competition among government units is beneficial or detrimental to economic growth. In order to accurately measure the multifaceted aspects of governmental organizational form a series of fragmentation indexes proposed and advanced in the literature are tested and expanded upon in a Carlino-Mills model on county economic growth over the period from 1992 to 2002. To accomplish this task, data from the Census of Government was used to extract and identify state and local government expenditures and revenues to create fragmentation indexes at the county and state level. How governmental organizational form is measured specifically has been shown to affect the regression results. State organizational form has greater implications for economic growth than organizational form at the county level, but the interaction between state and county government units is shown to be the most significant. Government units per capita, a common measure of government fragmentation, can bias the results in favor of more consolidation. The results from the dissertation do not provide any support to the contention that government fragmentation is harmful to the economic growth prospects.