Democracy and the fiscal decentralisation: government size nexus in Iran

This study investigates the role of democracy in the relationship between fiscal decentralisation and government size in Iran using data from 1981 to 2021. The results of the co-integration analysis based on the Autoregressive Distributed Lag (ARDL) approach show that in the long run, fiscal decentralisation has a negative and statistically significant effect on government size. Additionally, the interaction effect between democracy and fiscal decentralisation is negative and statistically significant, suggesting that the impact of fiscal decentralisation on government size depends on the level of democracy in such a way that the negative effect of financial decentralisation on the size of the government increases with the increase of democracy. In other words, the higher the level of democracy, the greater the reduction in government size resulting from a one-unit increase in fiscal decentralisation.