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Measuring the Strength of the Theories of Government Size

Andros Kourtellos, Alex Lenkoski and Kyriakos Petrou

University of Cyprus Working Papers in Economics from University of Cyprus Department of Economics

Abstract: Existing theoretical and empirical evidence on the determinants of government expenditure is inconclusive. We posit that the main cause of this problem is theory uncertainty, which arises due to the fact that the different theories imply different mutually compatible and interrelated mechanisms. This paper proposes a novel model averaging method to perform model averaging in linear regression systems that allows for endogeneity. Using data for more than 90 countries we assess the evidentiary support for nine different theories. Our results suggest that the government size and its components are explained by multiple mechanisms that work simultaneously but differ in their impact and importance. In particular, for general government total expenditure we find decisive evidence for the demography theory and a strong evidence for the globalization and political institution theory. In the case of central government total expenditure, we find that income inequality and macroeconomic policy play a decisive role in addition to demography.

Keywords: Bayesian Model Averaging; Conditional Bayes Factors; Endogeneity; Government Expenditure; Gibbs Sampling (search for similar items in EconPapers)
JEL-codes: C4 C11 C59 H10 H50 (search for similar items in EconPapers)
Pages: 67 pages
Date: 2017-12
New Economics Papers: this item is included in nep-pol
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