2
socially optimal level if subnational governments are engaged in the welfare function.
However, the conventional wisdom has been challenged on several grounds.
Some empirical studies provide a rationale for subnational welfare policies (Pauly,
1973). Also, the empirical evidence on the mobility factor is mixed (Blank, 1988;
Walker, 1994). With the evidence on limited mobility and varying preferences regarding
welfare provision, a subnational role in providing welfare function may be justified.
Although there is a lively debate about whether or not these functions are
legitimate activities for subnational governments, the literature lacks systematic
analyses of the impact of fiscal decentralization on the functional responsibility of
subnational governments. Because functional realignment between the levels of
government is expected as fiscal decentralization proceeds, it is important to examine
the relationship between fiscal decentralization and functional responsibility.
Trend of Fiscal Decentralization
Figure 1 shows how state and local government shares of total government
expenditures have changed during the last twenty years. The state government share of
total government expenditures has increased from 16.2 percent in 1981 to 19.3 percent
in 1999. The local government share of total government expenditures has also
increased, from 24.8 percent in 1981 to 26.8 percent in 1999. These figures illuminate
Convention