Baumol's cost disease and Leviathan

Otto Brøns-Petersen

Chapter 9 in Elgar Encyclopedia of Public Choice, 2025, pp 62-69 from Edward Elgar Publishing

Abstract: The Baumol effect, or “cost disease,” has been widely recognized as a significant driver of rising government spending in Western democracies. This phenomenon occurs as wages in the low productivity public sector converge with those in the private sector, causing an increasing share of government expenditure. While the original Baumol effect is primarily rooted in supply side technical factors, public choice theory highlights the critical role of political demand side forces. Political decisions, institutional dynamics, and rent-seeking behavior, such as special interests, bureaucratic incentives, and electoral pressures, contribute to the cost disease. Privatization and institutional reforms could be potential solutions to mitigate the problem.

Keywords: Baumol effect; Cost disease; Growth of government; Rent-seeking; Creative destruction (search for similar items in EconPapers)
Date: 2025
ISBN: 9781802207743
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