Measuring the strength of the theories of government size
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Measuring the strength of the theories of government size Andros Kourtellos1
· Alex Lenkoski2 · Kyriakos Petrou1
Received: 5 October 2018 / Accepted: 27 May 2019 © Springer-Verlag GmbH Germany, part of Springer Nature 2019
Abstract This paper investigates the role of model uncertainty in explaining the different findings in the literature regarding the determinants of government expenditure and its components. In particular, we systematically assess the evidentiary support for nine different theories using a novel model averaging method that allows for endogeneity. Our results suggest that the government size and its components are explained by multiple mechanisms that work simultaneously but differ in their impact and importance. Hence, policy makers should avoid relying on any particular model to make policy decisions. More precisely, for general government total expenditure we find decisive evidence for the demography theory and a strong evidence for the globalization and political institution theory. In the case of central government total expenditure, we find that income inequality and macroeconomic policy play a decisive role in addition to demography. Keywords Government size · Theory uncertainty · Model averaging JEL Classification C11 · C59 · H10 · H50
1 Introduction A fundamental question in the public finance literature is what the determinants of government size are. For many nations, including the most developed ones, government expenditure constitutes a large share of the GDP—world average 28%, G7 average 40% and EU average 43% over the period of 1970 to 2010—and thus, characteristics
Electronic supplementary material The online version of this article (https://doi.org/10.1007/s00181019-01718-0) contains supplementary material, which is available to authorized users.
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Andros Kourtellos [email protected]
1
University of Cyprus, Nicosia, Cyprus
2
Norwegian Computing Center, Oslo, Norway
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A. Kourtellos et al.
of such activities cannot be left unexplained. Government expenditure is also characterized by substantial heterogeneity even among the most developed countries. For example, for 168 countries over the period of 1970–2010, the expenditure of the general government ranges from 6% for Guinea–Bissau to 61% for Denmark on average. Notably, among the high-income countries, Singapore, Japan and Chile average 17%, 20% and 24%, respectively, while Israel, the Netherlands and Denmark average 56%, 57% and 61%, respectively. More importantly, governments may adopt policies that either extend government expenditure because of concerns about the welfare of citizens or limit government spending due to concerns about the unsustainability of the public debt trajectory. For instance, the central government will reduce its spending if it believes that the centralized provision of public goods such as education or healthcare is a major factor of government size. Such policies, however, like the recent debate in the USA on Obamacare, may have substantial implications on redistribution and inequality i
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