A supply-demand model of the size of public sector and Wagner's law

Igor Fedotenkov and Georgy Idrisov

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper, we develop a supply-demand model for the public sector, measured as governments' tax revenues divided by GDP. We use a political equilibrium with a rule of majority. The model takes into account inefficiencies caused by taxes and includes costs associated with public goods provision to consumers. We show that the size of the public sector depends on the median voter's income, size of population, costs associated with taxpaying, and quality of institutions, which reflect costs of public goods provision. The estimates for the OECD countries (2000-2017), using dynamic panel model techniques, are in line with the theoretical predictions; however, they do not confirm Wagner's law. Our estimates suggest that the size of the government sector grows as income increases, but at a slower rate. We show that the quality of institutions matters: a more effective government raises the share of public sector; better regulations, which permit and promote private sector development, reduce it.

Keywords: Size of public sector; tax burden; median voter; Wagner's law; political equilibrium (search for similar items in EconPapers)
JEL-codes: D60 D72 H30 H41 I38 P16 P43 P48 (search for similar items in EconPapers)
Date: 2019-07-09
New Economics Papers: this item is included in nep-pbe and nep-pol
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