Government and growth: Cross-sectional evidence

Economic theory suggests that government contributes to total economic growth in two ways: positively, through the provision of Pigovian public goods and services; and negatively, through the inefficient provision of such goods and services and the distortionary effects attendant with their provision. This paper develops a model that differentiates the two effects and empirically tests the model for a sample of forty-eight countries. Evidence suggests that the net effect of government on growth is positive, but that the negative effects are not insignificant. Though growth in government output contributes to total economic growth, at the margin this is approximately offset by distortionary effects attendant with increases in the relative size of government.