Skip to main content
SpringerLink
Log in

Legitimacy and the cost of government

  • Published:
Public Choice Aims and scope Submit manuscript

Abstract

While previous research documents a negative relationship between government size and economic growth, suggesting an economic cost of big government, a given government size generally affects growth differently in different countries. As a possible explanation of this differential effect, we explore whether government legitimacy (measured by satisfaction with the way democracy works) influences how a certain government size affects growth. On the positive side, a government perceived as legitimate may “get away” with being big since legitimacy can affect behavioral response to, and therefore the economic growth cost of, taxation and government expenditures. On the negative side, perceived legitimacy may make voters less prone to acquire information, which in turn facilitates interest-group oriented or populist policies that harm growth. A panel-data analysis of up to 30 developed countries, in which two different measures of the size of government are interacted with government legitimacy, reveals that perceived legitimacy exacerbates a negative growth effect of government size in the long run. This could be interpreted as governments taking advantage of being regarded as legitimate in order to secure short-term support at a long-term cost to the economy.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3

Similar content being viewed by others

Notes

  1. Note that we do not study how legitimacy affects government size or vice versa.

  2. Other relevant studies include Mendoza et al. (1997), Bleaney et al. (2001) and Facchini and Melki (2013).

  3. Nijkamp and Pot (2004) provide an earlier metaanalysis of 93 published studies and find indications of a positive but weak effect on growth of expenditures on education and infrastructure, as well as support for the hypothesis that higher taxes lower growth.

  4. A similar understanding of legitimacy is developed by Beetham (1993), who lists three criteria of legitimacy: whether power is acquired and exercised according to established rules; whether the rules are justifiable by reference to shared beliefs; and whether people approve of the political system. This view is also expressed by Colombatto (2014), who is wary of consequentialist explanations of legitimacy and sees it as being a matter of subjective value judgment which originates from the individual’s assessment of the prevailing rules of the game in the light of his own criteria of fairness and justice.

  5. As Bergh and Henrekson (2011, p. 873) note: “There are also strong theoretical reasons to expect different types of taxes and expenditures to have differential growth effects”.

  6. Studies show that social trust is negatively related to the demand for and supply of regulations (Aghion et al. 2010; Bergh and Bjørnskov 2011; Pinotti 2012). However, Pitlik and Kouba (2014) show that people who trust government (relative to private sector companies) favor interventionism even if their social trust is strong.

  7. See Clark and Lee (2001) for an analysis of how expressive voting can make voters prone, when trusting government, to support interest-group policies that are presented with public-interest arguments.

  8. We have checked whether legitimacy as such directly affects government size, and we found only very weakly significant and quite small effects. Thus, there is no strong relationship between legitimacy and government size in our data, so this potential effect should not confound our other findings.

  9. Bjørnskov and Sønderskov (2013) show that both in individual- and macro-level tests, confidence measures of political institutions tend to capture the same concept.

  10. The imputation formula derives from a set of OLS regressions using the observations from the mid-1990s in which both questions about confidence in specific institutions and the question of satisfaction with democracy were asked. A specification with a constant term, confidence in parliament and confidence in parties yielded the clearly best fit. We then used the constant and coefficients from this regression reported in (1) to impute comparable scores for the period from the mid-1990s to 2011.

  11. Basic institutional measures are sufficiently stable over time that imputation is unlikely to imply major imprecision (Sobel and Coyne 2011). We therefore follow Nyström (2008) in linearly interpolating values between 5 year points.

  12. Similarly, short-run effects are calculated as γ1 + δ1 L and λ1 + δ1 G, respectively. Yet, since we do not focus on such effects, we refrain from showing the relatively limited short-run estimates.

  13. More precisely, ECM can credibly separate short- and long-run effects if potential J-curve adaptions do not extend so long into the future that they dominate any true long-run effects. Given the speed with which countries adapt after most crises, we believe this to be unlikely.

  14. The average negative effects can also be seen when not including an interaction term between government size and legitimacy (results available upon request). However, compared to the results in Tables 3 and 4, not including an interaction term clearly inflates the standard errors of central estimates, rendering government size statistically insignificant in its long-term effect on growth.

  15. We have ensured that our main findings do not change when using a fixed effects estimator in levels or when aggregating our data into non-overlapping five-year periods (results available upon request). The main difference is that the choice of applying an ECM reduces the amount of noise due to short-term effects, rendering the long-run effects more precisely estimated.

  16. We do not doubt that good legal institutions and strong protection of private property rights are positively associated with economic development in the long run. However, with our choice of estimation strategy across a group of relatively similar countries, we are technically unable to detect this influence.

References

  • Acemoglu, D., & Johnson, S. (2005). Unbundling institutions. Journal of Political Economy, 113(5), 949–995.

    Article  Google Scholar 

  • Aghion, P., Algan, Y., Cahuc, P., & Shleifer, A. (2010). Regulation and distrust. Quarterly Journal of Economics, 125(3), 1015–1049.

    Article  Google Scholar 

  • Aidt, T. (2003). Economic analysis of corruption: A survey. Economic Journal, 11(491), F632–F652.

    Article  Google Scholar 

  • Alfonso, A., & Furceri, D. (2010). Government size, composition, volatility and economic growth. European Journal of Political Economy, 26(4), 517–532.

    Article  Google Scholar 

  • Beetham, D. (1993). In defence of legitimacy. Political Studies, 41(3), 488–491.

    Article  Google Scholar 

  • Bergh, A., & Bjørnskov, C. (2011). Historical trust levels predict current welfare state size. Kyklos, 64(1), 1–19.

    Article  Google Scholar 

  • Bergh, A., & Henrekson, M. (2011). Government size and growth: A survey and interpretation of the evidence. Journal of Economic Surveys, 25(5), 872–897.

    Article  Google Scholar 

  • Bergh, A., & Karlsson, M. (2010). Government size and growth: Accounting for economic freedom and globalization. Public Choice, 142(1), 195–213.

    Article  Google Scholar 

  • Bjørnskov, C., & Sønderskov, K. M. (2013). Is social capital a good concept? Social Indicators Research, 114(3), 1225–1242.

    Article  Google Scholar 

  • Bjørnskov, C., & Méon, P.-G. (2013). Is trust the missing root of institutions, education, and development? Public Choice, 157(3–4), 641–669.

    Article  Google Scholar 

  • Bleaney, M., Gemmell, N., & Kneller, R. (2001). Testing the endogenous growth model: Public expenditure, taxation, and growth over the long run. Canadian Journal of Economics, 34(1), 36–57.

    Article  Google Scholar 

  • Blind, P. K. (2006). Building trust in government in the twenty-first century: Review of literature and emerging issues. Unpublished manuscript, UNDESA, New York.

  • Brambor, T., Roberts Clark, W., & Golder, M. (2006). Understanding interaction models: Improving empirical analyses. Political Analysis, 14(1), 63–82.

    Article  Google Scholar 

  • Buchanan, J. M. (1967). The fiscal illusion. Public finance in democratic process (pp. 126–142). Chapel Hill: University of North Carolina Press.

    Google Scholar 

  • Caplan, B. (2007). The myth of the rational voter. Princeton: Princeton University Press.

    Google Scholar 

  • Caplan, B., & Stringham, E. (2005). Mises, Bastiat, public opinion, and public choice. Review of Political Economy, 17(1), 79–105.

    Article  Google Scholar 

  • Chang, Y., Chu, Y., & Huang, M. (2006). The uneven growth of democratic legitimacy in East Asia. International Journal of Public Opinion Research, 18(2), 246–255.

  • Chanley, V. A., Rudolph, T. J., & Rahn, W. M. (2000). The origins and consequences of public trust in government: A time series analysis. Public Opinion Quarterly, 64(3), 239–256.

  • Clark, J. R., & Lee, D. R. (2001). Is trust in government compatible with trustworthy government? In W. F. Shughart II & L. Razzolini (Eds.), The Elgar companion to public choice. Cheltenham: Edward Elgar.

    Google Scholar 

  • Colombatto, E. (2014). A theory of institutional resilience. In T. Eisenberg & G. B. Ramello (Eds.), Research handbook on comparative law and economics. Cheltenham: Edward Elgar.

    Google Scholar 

  • De Boef, S., & Keele, L. (2008). Taking time seriously. American Journal of Political Science, 52(1), 184–200.

    Article  Google Scholar 

  • Downs, A. (1957). An economic theory of democracy. Cambridge: Cambridge University Press.

    Google Scholar 

  • EuroBarometer (2013). Standard EuroBarometer, all editions 1973–2012. Online database. Available at http://ec.europa.eu/public_opinion/index_en.htm.

  • Facchini, F., & Melki, M. (2013). Efficient government size: France in the 20th century. European Journal of Political Economy, 31(September), 1–14.

    Article  Google Scholar 

  • Flachaire, E., García-Peñalosa, C., & Konte, M. (2014). Political versus economic institutions in the growth process. Journal of Comparative Economics, 42(1), 212–229.

    Article  Google Scholar 

  • Gilley, B. (2006). The determinants of state legitimacy: Results for 72 countries. International Political Science Review, 27(1), 47–71.

    Article  Google Scholar 

  • Gwartney, J. D., Lawson, R. A., & Hall, J. (2012). Economic freedom of the world: 2012 annual report. Vancouver: The Fraser Institute.

  • Halla, M., & Schneider, F. G. (2014). Taxes and benefits: Two options to cheat on the state. Oxford Bulletin of Economics and Statistics, 76(3), 411–431.

    Article  Google Scholar 

  • Heston, A., Summers, R., & Aten, B. (2012). Penn world tables version 7.1. Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania.

  • King, R. G., & Rebelo, S. (1990). Public policy and economic growth: Developing neoclassical implications. Journal of Political Economy, 98(5), S126–S150.

    Article  Google Scholar 

  • Kneller, R., Bleaney, M. F., & Gemmell, N. (1999). Fiscal policy and growth: Evidence from OECD countries. Journal of Public Economics, 74(2), 171–190.

    Article  Google Scholar 

  • Levi, M., Sacks, A., & Tyler, T. R. (2009). Conceptualizing legitimacy, measuring legitimating beliefs. American Behavioral Scientist, 53(3), 354–375.

    Article  Google Scholar 

  • Lieberman, E. S. (2002). Taxation data as indicators of state-society relations: Possibilities and pitfalls in cross-national research. Studies in Comparative International Development, 36(4), 89–115.

    Article  Google Scholar 

  • Lipset, S. M. (1959). Some social requisites of democracy: Economic development and political legitimacy. American Political Science Review, 53(1), 69–105.

    Article  Google Scholar 

  • Mendoza, E. G., Milesi-Feretti, G. M., & Asea, P. (1997). On the ineffectiveness of tax policy in altering long-run growth: Harberger’s superneutrality conjecture. Journal of Public Economics, 66(1), 99–126.

    Article  Google Scholar 

  • Murphy, K. M., Shleifer, A., & Vishny, R. W. (1993). Why is rent-seeking so costly to growth? American Economic Review, 83(2), 409–414.

    Google Scholar 

  • Nannestad, P., & Paldam, M. (1994). From the pocketbook of the welfare man: A pooled cross-section study of economic voting in Denmark, 1986–92. British Journal of Political Science, 27(1), 119–136.

    Google Scholar 

  • Nijkamp, P., & Pot, J. (2004). Meta-analysis of the effect of fiscal policies on long-run growth. European Journal of Political Economy, 20(1), 91–124.

    Article  Google Scholar 

  • Nordhaus, W. (1975). The political business cycle. Review of Economic Studies, 42(2), 169–190.

    Article  Google Scholar 

  • Nyström, K. (2008). The institutions of economic freedom and entrepreneurship: Evidence from panel data. Public Choice, 136(3–4), 269–282.

    Article  Google Scholar 

  • OECD (2013). OECD tax statistics. Database. Online database available at doi:10.1787/tax-data-en.

  • Oto-Peralías, D., & Romero-Ávila, D. (2013). Tracing the link between government size and growth: The role of public sector quality. Kyklos, 66(2), 229–255.

    Article  Google Scholar 

  • Pinotti, P. (2012). Trust, regulation and market failures. Review of Economics and Statistics, 94(3), 650–658.

    Article  Google Scholar 

  • Pitlik, H., & Kouba, L. (2014). Does social distrust always lead to a stronger support for government intervention? Policy paper no. 8, WWWforEurope, European Commission, Brussels.

  • Richardson, G. (2008). The relationship between culture and tax evasion across countries: Additional evidence and extensions. Journal of International Accounting, Auditing and Taxation, 17(2), 67–78.

    Article  Google Scholar 

  • Rodrik, D., Subramanian, A., & Trebbi, F. (2004). Institutions rule: The primacy of institutions over geography and integration in economic development. Journal of Economic Growth, 9(2), 131–165.

    Article  Google Scholar 

  • Romero-Ávila, D., & Strauch, R. (2008). Public finances and long-term growth in Europe: Evidence from a panel data analysis. European Journal of Political Economy, 24(1), 172–191.

    Article  Google Scholar 

  • Rudolph, T. J. (2009). Political trust, ideology, and public support for tax cuts. Public Opinion Quarterly, 73(1), 144–158.

    Article  Google Scholar 

  • Rudolph, T. J., & Evans, J. (2005). Political trust, ideology, and public support for government spending. American Journal of Political Science, 49(3), 660–671.

    Article  Google Scholar 

  • Sobel, R. S., & Coyne, C. J. (2011). Cointegrating institutions: The time series properties of country institutional measures. Journal of Law and Economics, 54(1), 111–134.

    Article  Google Scholar 

  • Tyler, T. R. (2006a). Psychological perspectives on legitimacy and legitimation. Annual Review of Psychology, 57, 357–400.

    Article  Google Scholar 

  • Tyler, T. R. (2006b). Why people obey the law. Princeton: Princeton University Press.

    Google Scholar 

  • WDI (2013). World development indicators. Database. Washington, DC: World Bank.

  • Weede, E. (1996). Legitimacy, democracy and comparative economic growth reconsidered. European Sociological Review, 12(3), 217–225.

    Article  Google Scholar 

  • Yamamura, E. (2014). Trust in government and its effect on preferences for income redistribution and perceived tax burden. Economics of Governance, 15(1), 71–100.

    Article  Google Scholar 

Download references

Acknowledgments

The authors wish to thank Andreas Bergh, Enrico Colombatto, Jerg Gutmann, Pelin Ayan Musil, Christoph Schenke, participants at the Institute for Research in Economic and Fiscal Issues (IREF) and Anglo-American University workshop in Prague and participants at the Public Choice Society Meetings in Charleston for useful comments and suggestions, and the Institute for Research in Economic and Fiscal Issues (IREF) (all), the Swedish Research Council (Berggren) and Johan & Jakob Söderberg’s Foundation (Berggren) for financial support. Rasmus Rødby Kristiansen and Aleš Rod provided excellent research assistance.

Author information

Authors and Affiliations

  1. Research Institute of Industrial Economics (IFN), P.O. Box 55665, 102 15, Stockholm, Sweden

    Niclas Berggren & Christian Bjørnskov

  2. Department of Institutional, Environmental and Experimental Economics, University of Economics, Prague, Czech Republic

    Niclas Berggren

  3. Department of Economics and Business, Aarhus University, Fuglesangs Allé 4, 8210, Aarhus V, Denmark

    Christian Bjørnskov

  4. School of International Relations and Diplomacy, Anglo-American University, Lázeňská 4, 118 00, Prague, Czech Republic

    David Lipka

  5. Jan Evangelista Purkyne University, Pasteurova 1, 400 96, Ústí nad Labem, Czech Republic

    David Lipka

Authors
  1. Niclas Berggren
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Christian Bjørnskov
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. David Lipka
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Niclas Berggren.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Berggren, N., Bjørnskov, C. & Lipka, D. Legitimacy and the cost of government. Public Choice 162, 307–328 (2015). https://doi.org/10.1007/s11127-014-0224-9

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11127-014-0224-9

Keywords

JEL Classification

Search

Navigation