Does Centralization Increase the Size of Government? The Effects of Separation of Powers and Lobbying

Difficulties faced by the Economic and Monetary Union have strengthened the position of those who advocate a process of (further) political integration in the European Union (EU). A widespread fear is, though, that such a process would favor powerful interest groups able to lobby the EU policymakers. Persson and Tabellini (1994) argue that political centralization will increase the size of the government through lobbying because of free-riding incentives created by federally funded programs with localized benefits. We extend their analysis by presenting a model where the budgeting process is divided into two stages, instead of one, which better captures the EU institutional framework. A federal legislator (the Council) chooses the size of the budget at one stage, while a federal agency (the Commission) chooses the allocation of the budget at the next stage. We show that separation of powers in the budgeting process restricts free riding and, therefore, reduces the incentives to lobby. The result is an unchanged budget under centralization. Moreover, it is shown that if the lobbying activity is directed to both policymakers, competitive lobbying may actually reduce the size of the public sector under centralized policymaking.