New evidence on government efficiency

Government is generally not considered an efficient producer. Yet, conceptually, it is relatively simple to construct a system of incentives and controls that should lead to efficiency. The outcomes of over 1700 recent competitions between government producers and the private sector, conducted under OMB's Commercial Activity (CA) Program, provide new evidence. Analysis of the Navy's CA program outcomes demonstrates that the government is as efficient as the private supplier at least 21% of the time. The local incentives and controls that induce this outcome are not widespread, however. Less than half of the government managers selected an efficient mix of inputs without a competitive stimulus and an additional seven percent of the managers did not do so even then.     

A new framework for testing the effect of government spending on growth and productivity

Does government spending have a positive or negative effect on economic growth? The results of earlier empirical studies give mixed results. In this study we suggest a new method for testing the effect of different kinds of government expenditure on productivity growth in the private sector. The focus on productivity in the private sector and the use of disaggregated data makes it possible to avoid or mitigate a number of methodological problems. The major conclusions, which are quite robust, are that government transfers, consumption and total outlays have consistently negative effects, while educational expenditure has a positive effect, and government investment has no effect on private productivity growth. The impact is also found to work solely through total factor productivity and not via the marginal productivity of labor and capital.     

Procyclical government spending: a public choice analysis

Procyclical government spending occurs when government expenditures increase at a faster rate than income in an economic upturn but fall at a faster rate in a recession. Voracity effects occur when competition for increased spending proves more effective as national income increases. Public choice theory can be applied to describe the distribution of fiscal power across different tiers of government to shed insight into competition for intergovernmental transfers. Politicians have electoral incentives to press for intergovernmental transfers but they also have electoral incentives to signal their ability to manage the economy. With this mix of incentives, the prediction is that intergovernmental transfers will be procyclical and that sub-central government spending will be more procyclical than central government spending. Public choice analysis of pressure for increased public spending predicts a specific pattern of cyclical government spending. This pattern can be observed when analyzing government expenditures in 20 OECD countries between 1995 and 2006.     

Globalization,government spending and taxation in the OECD

Abstract. This article assesses the impact of globalization on welfare state effort in the OECD countries. Globalization is defined in terms of total trade, imports from low wage economies, foreign direct investment, and financial market integration. Welfare effort is analyzed in terms both of public spending (and separately on social service provision and income transfer programs) and taxation (effective rates of capital taxation and the ratio of capital to labor and consumption taxes). Year–to–year increases in total trade and international financial openness in the past three decades have been associated with less government spending. In contrast, integration into global markets has not been associated either with reductions in capital tax rates, or with shifts in the burden of taxation from capital to consumption and labor income. Moreover, countries with greater inflows and outflows of foreign direct investment tend to tax capital more heavily.     

Inefficient households and the mix of government spending

A model is presented in which individuals can vote over government subsidies to a private good and over redistributive taxation. The subsidized good is purchased and shared by couples who act noncooperatively, while possibly being altruistic towards each other. The framework allows a separation of the subsidy policy from redistributive policy. In a majority voting equilibrium the subsidy is used exclusively to correct the individuals' spending pattern. The results suggest that spending on private goods should be an important item in government expenditures when there is strong positive income bias in the political process and/or when household decisions are relatively inefficient.     

The effect of legislature size on public spending: evidence from a regression discontinuity design

What is the effect of legislature size on public spending? An answer to this question is provided by Weingast et al. (J Polit Econ 89(4):642–664, 1981), whose “law of 1/n” posits that an increase in the number of elected representatives always leads to an increase in public spending. Because elected politicians regard the tax base as a common pool from which they can finance specific projects for their constituencies, and these specific constituencies internalize the full benefits of the projects, but only bear a fraction of the costs (projects are financed from the common tax base), fiscal inefficiency will increase with the number of representatives. In this paper, I test the validity of the “law of 1/n” using a dataset of 9325 German municipalities between 2008 and 2010. Through the application of a regression discontinuity design, many of the methodological pitfalls of previous studies can be avoided and a valid estimation of the causal effect of legislature size on public spending for German municipalities can be determined. The results do not corroborate the positive findings of previous studies, which generally supported the implications of the “law of 1/n”. For the years 2008–2010, I find a negative effect of legislature size on public spending in German municipal councils.     

Legislature size and government spending in Italian regions: Forecasting the effects of a reform

We analyze the effect of different legislature size on per capita regional expenditure in Italy. According to the theory, legislature size has an indefinite effect on government spending because logrolling and transaction costs may have canceling effects. We find a large and significantly positive effect of the number of legislators. We use these findings to forecast the effects of the increase in the number of legislators that is taking place in some regions: a 10% increase in legislature size commands on average a 12% increase in per capita regional expenditure.     

An examination of the causal relationship between government spending and revenue: A cointegration analysis

This paper tests the validity of the proposition that there is a causal relationship between government expenditure and government revenue for Greece over the period 1957–1993. The empirical analysis employs tests of cointegration as pre-tests for Granger tests of causality. The empirical evidence suggests that there is a long-run relationship between government spending and government revenue and expenditures cause revenues.     

Supermajority rule,the law of 1/n,and government spending: a synthesis

I develop models in which a minimum winning coalition decides on the level of government spending, where the Coase theorem holds amongst members of the winning coalition. An increase in the supermajority requirement has potentially conflicting effects on spending. A higher requirement increases the tax price internalized by the minimum winning coalition, but also increases the number of districts included in this coalition. I develop separate models in which the spending in question consists of (i) a nonexcludable good, (ii) a distributive consumption good, (iii) infrastructure spending and (iv) a transfer payment. A supermajority rule has no effect on spending for nonexcludable goods and ambiguous effects on spending for distributive projects and infrastructure spending. An increased supermajority requirement does unambiguously reduce transfer spending. I also relate the supermajority rule to the law of 1/n. If the Coase Theorem holds and a minimum winning coalition forms, an increase in the number of districts n has precisely the same effect on overall expenditure as a decrease in the supermajority requirement. Thus, the ambiguous spending effects stemming from supermajority rule carry over into this version of the law of 1/n.     

Pay for politicians and campaign spending: evidence from the French municipal elections

Public Choice - This paper investigates the relationship between taxation and firm performance in developing countries. Combining firm-level data from the World Bank Enterprise Surveys and tax data...     

The petit effect of campaign spending on votes: using political financing reforms to measure spending impacts in multiparty elections

Public Choice - This paper explores the relation between campaign spending and votes, in France, relying on political financing reforms as a quasi-natural experiment to assess if and how spending...     

Seat-vote curves, loyalty effects and the provincial distribution of Canadian government spending

Federal government spending in the Canadian provinces for 1962–2002 is examined with emphasis on the role of seat-vote elasticities in majoritarian electoral systems. Fixed effects regressions establish that per capita federal spending in a province increases with political competition, as measured by provincial seat-vote elasticities, and with loyalty to the federal government as measured by the degree of provincial support for the federal government. However, too much loyalty can be counter-productive because very loyal provinces are uncompetitive with low seat-vote elasticities.     

Determinants of government size: evidence from China

This paper investigates the determinants of government size at the provincial level in China. We employ the panel data model as a platform for empirical analysis and control for endogeneity in the study. Our study shows that openness to trade and foreign direct investment (FDI) may curtail government expansion, and that the provincial-level public sector is characterized by economies of scale. This study also documents that Wagner’s law does not hold true for China. Moreover, both expenditure decentralization and revenue decentralization contribute to the expansion of China’s government.     

Government spending and happiness of the population: additional evidence from large cross-country samples

This study uses large cross-country samples and several measures of happiness, income, and government spending to revisit the relation between government spending and the population’s happiness. The main finding is that increased government spending does not lower happiness in broad cross-country contexts. Much caution is, therefore, urged in interpreting the negative association between government spending and happiness reported in some earlier studies and the suggested policy implications. Three additional points are noted. First, the weight of the evidence suggests a significant positive association between income and happiness. Second, estimates based on income and government-share data from Penn World Table and the new International Comparison Program show similar patterns. Third, the parameter for generalized trust seems fragile.     

State budget periodicity: An analysis of the determinants and the effect on state spending

Much of the public budgeting literature focuses on the institutional rules of budgeting and how those rules affect process and outcomes. This study focuses on a particularly rudimentary rule of budgeting: the length of the budget period. State budgets are dictated (constitutionally or statutorily) to recur over one-or two-year intervals. Statistical analysis of the determinants of state budget periodicity shows that the more states spend, ceteris paribus, the more likely they are to budget annually. I hypothesize that budget periodicity has the opposite effect on spending: Biennial budget states spend more, ceteris paribus, than annual budget states spend. Ordinary least squares analysis does not support the hypothesis, but with instrumental variable methods, biennial budgeting exhibits a positive and statistically significant effect on state spending.