In Chapter Two, we review the literature on this topic. First, we present three
hypotheses that explain the variation of public sector employment across countries and
over time. We also examine studies that relate to the determinants of public sector
employment. However, we argue that most previous studies have ignored the structural
change in public sector employment that may be generated by fiscal decentralization.
Then, we review two different view points on the relationship between decentralization
and public sector size, as measured by the ratio of public expenditure or revenue over
GDP. From our literature review we find that despite the growing literature on fiscal
decentralization issues, there has been so far little theoretical or empirical work done on