A supply-demand model of public sector size

Igor Fedotenkov and Georgy Idrisov

Economic Systems, 2021, vol. 45, issue 2

Abstract: We develop a supply-demand model for the public sector with a political equilibrium. The model considers the inefficiencies caused by taxes and includes costs associated with the provision of public goods to consumers. We show that the size of the public sector may depend on the median voter's income, population size, costs associated with paying tax, and quality of institutions, all of which reflect the costs of provisioning public goods. The estimates for the Organisation for Economic Co-operation and Development member countries are compatible with theoretical predictions; however, they do not confirm Wagner's law, which holds that the public sector share does not grow with an increase in income. A greater dependency ratio and the Gini coefficient increase demand for redistribution policies. Greater government effectiveness is a supply-side factor that increases the public sector's share in an economy.

Keywords: Size of public sector; Tax burden; Median voter; Wagner's law; Political equilibrium (search for similar items in EconPapers)
JEL-codes: D72 H30 H41 I38 P16 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecosys:v:45:y:2021:i:2:s0939362521000170

DOI: 10.1016/j.ecosys.2021.100869

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