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Modelling the Composition of Government Expenditure in Democracies

John Creedy and Solmaz Moslehi ()

No 1007, Department of Economics - Working Papers Series from The University of Melbourne

Abstract: This paper considers whether the ratio of transfer payments to expenditure on public goods in democracies can be explained as the outcome of majority voting. A simple model is constructed in which individuals vote for government expenditure on a public good, for a given income tax rate. The transfer payment is then determined by the government’s budget constraint. The equilibrium ratio of transfers to public good expenditure per person is expressed as a quadratic function both of the ratio of the median to the mean wage, and of the tax rate. Data for 29 democratic countries are used to estimate a cross-sectional regression. The empirical results confirm that reductions in the skewness of the wage rate distribution are associated with reductions in transfer payments relative to public goods expenditure, at a decreasing rate. Furthermore, increases in the tax rate, from relatively low levels, are associated with increases in the relative importance of transfer payments. But beyond a certain level, further tax rate increases are associated with a lower ratio of transfers to public goods.

Pages: 36 pages
Date: 2007
New Economics Papers: this item is included in nep-cdm, nep-pbe and nep-pol
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Citations: View citations in EconPapers (5)

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Journal Article: Modelling the composition of government expenditure in democracies (2009) Downloads
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