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Measuring the Strength of the Theories of Government Size

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  • Andros Kourtellos
  • Alex Lenkoski
  • Kyriakos Petrou

Abstract

Existing theoretical and empirical evidence on the determinants of government expenditure is inconclusive. We posit that the main cause of this problem is theory uncertainty, which arises due to the fact that the different theories imply different mutually compatible and interrelated mechanisms. This paper proposes a novel model averaging method to perform model averaging in linear regression systems that allows for endogeneity. Using data for more than 90 countries we assess the evidentiary support for nine different theories. 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. In particular, 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.

Suggested Citation

  • Andros Kourtellos & Alex Lenkoski & Kyriakos Petrou, 2017. "Measuring the Strength of the Theories of Government Size," University of Cyprus Working Papers in Economics 11-2017, University of Cyprus Department of Economics.
    • Handle: RePEc:ucy:cypeua:11-2017
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    More about this item

    Keywords

    Bayesian Model Averaging; Conditional Bayes Factors; Endogeneity; Government Expenditure; Gibbs Sampling;
    All these keywords.

    JEL classification:

    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C59 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Other
    • H10 - Public Economics - - Structure and Scope of Government - - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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