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Public Choice

, Volume 175, Issue 1–2, pp 1–18 | Cite as

Cost disease in defense and public administration: Baumol and politics

  • Lars-Erik Borge
  • Kjetil Hatlebakk Hove
  • Tobias Lillekvelland
  • Per Tovmo
Article
  • 196 Downloads

Abstract

William Baumol’s model predicts a steady increase in relative public sector prices (or costs) because of the combination of slow productivity growth and wage growth similar to sectors wherein productivity is growing more quickly. In this paper, we extend the Baumol model with political variables and analyze price growth in defense and public administration using Norwegian data. We find strong support for the mechanism of the Baumol model since manufacturing productivity is the most important determinant of relative public-sector prices. Greater political fragmentation has also contributed to the price growth, but its quantitative effect is smaller than that of manufacturing productivity. An analysis of a labor-intensive private service (restaurants and cafes) supports the broader relevance of the Baumol mechanism and the validity of the estimated effect of political fragmentation on the two sectors considered herein.

Keywords

Baumol mechanism Public sector prices Political fragmentation Error correction model 

JEL Classification

H11 H40 H56 

Notes

Acknowledgements

We appreciate comments from participants at LAGV (Aix-en-Provence), IIPF (Lugano) and EPCS (Groningen), and in particular from Anna Laura Mancini, Shintaro Nakagawa and Atin Basuchoudhary. We are also grateful to Gunnar Bårdsen for advice on specification and estimation, and to Steinar Todsen at Statistics Norway for supplying the data. Finally, we thank two referees for comments and suggestions that have improved the paper substantially.

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department of EconomicsNorwegian University of Science and TechnologyTrondheimNorway
  2. 2.Norwegian Defence Research Establishment (FFI)KjellerNorway

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