Interdependence of government expenditure among European countries: Productivity spillover and strategic interaction

Xiaodong Chen, Haoming Mi and Peng Zhou

Economic Inquiry, 2026, vol. 64, issue 2, 681-701

Abstract: We build an endogenous growth model that distinguishes productive and welfare government expenditures and embeds fiscal externalities. The model yields three testable hypotheses: (i) productive expenditure raises growth (Barro effect); (ii) productive expenditure generates cross‐country productivity spillovers; (iii) government expenditure structure exhibits spatial dependence. Estimation with a spatial‐panel dataset for 30 European economies (EU27 + 3) corroborates all three hypotheses. We further show that positive productivity externalities induce an international free‐rider problem, causing systematic under‐investment in productive expenditure, while negative welfare externalities trigger a “welfare tournament” and over‐spending on non‐productive expenditure.

Date: 2026
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https://doi.org/10.1111/ecin.70032

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Persistent link: https://EconPapers.repec.org/RePEc:bla:ecinqu:v:64:y:2026:i:2:p:681-701

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