Abstract
Recently, various authors have examined the relationship between growth in government size and total economic growth. In each case, the authors permitted only a monotonic relationship. This paper examines the issue of a non-linear relationship between growth in government and overall growth in the economy.
Government contributes to total economic output in various ways. The provision of Pigovian public goods enhances the productivity of the private sector inputs increasing total output. However, the public decision-making process can result in an inefficient quantity of public goods. The likelihood of this outcome increases with the size of government. Further negative effects are created by the revenue raising and spending mechanisms of government, and the increasing diversion of resources into ‘unproductive’ rent-seeking activities. The magnitude of these effects is likely to increase with the relative size of government.
A simultaneous equations model that incorporates these different influences is developed and tested using time-series data for the United States. The estimates indicate that the non-linear model is the better for explaining the growth of total economic output.
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I wish to thank Cliff Walsh, Jonathan Pincus, Gordon Tullock, and the participants of a seminar at the Department of Economics, Research School of Social Sciences, Australian National University, for their helpful comments. I, of course, remain responsible for all errors in the final product.
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Grossman, P.J. Government and economic growth: A non-linear relationship. Public Choice 56, 193–200 (1988). https://doi.org/10.1007/BF00115758
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DOI: https://doi.org/10.1007/BF00115758