Firm Profits and Government Activity: An Empirical Investigation

Petar Jolakoski, Branimir Jovanovic, Joana Madjoska, Viktor Stojkoski and Dragan Tevdovski

No 194, wiiw Working Papers from The Vienna Institute for International Economic Studies, wiiw

Abstract: If firm profits rise to a level far above than what would have been earned in a competitive economy, this might give the firms market power, which might in turn influence the activity of the government. In this paper, we perform a detailed empirical study on the potential effects of firm profits and markups on government size and effectiveness. Using data on 30 European countries for a period of 17 years and an instrumental variables approach, we find that there exists a robust relationship between firm gains and the activity of the state, in the sense that higher firm profits reduce government size and effectiveness. Even in a group of developed countries, such as the European countries, firm power may affect state activity.

Keywords: firm profits; government size; government effectiveness (search for similar items in EconPapers)
JEL-codes: C23 H11 H50 (search for similar items in EconPapers)
Pages: 31 pages including 13 Tables and 1 Figure
Date: 2021-02
New Economics Papers: this item is included in nep-cfn, nep-com, nep-cwa and nep-eff
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Related works:
Journal Article: Firm Profits and Government Activity: An Empirical Investigation (2022)
Working Paper: Firm profits and government activity: An empirical investigation (2020)
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