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Government and Economic Growth: A Non-Linear Relationship

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Abstract

Recently, various authors have examined the relationship between growth in government size and total economic growth. In each case, the authors permitted only a monotonic relationship. This paper examines the issue of a non-linear relationship between growth in government and overall growth in the economy. Government contributes to total economic output in various ways. The provision of Pigovian public goods enhances the productivity of the private sector inputs increasing total output. However, the public decision-making process can result in an inefficient quantity of public goods. The likelihood of this outcome increases with the size of government. Further negative effects are created by the revenue raising and spending mechanisms of government, and the increasing diversion of resources into 'unproductive' rent-seeking activities. The magnitude of these effects is likely to increase with the relative size of government. A simultaneous equations model that incorporates these different influences is developed and tested using time-series data for the United States. The estimates indicate that the non-linear model is the better for explaining the growth of total economic output.

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Bibliographic Info

Paper provided by Monash University, Department of Economics in its series Monash Economics Working Papers with number archive-04.

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Length: 8 pages
Date of creation: 1988
Date of revision:
Publication status: Published in Public Choice, Vol. 56, No. 2 (1988), pp. 193-200
Handle: RePEc:mos:moswps:archive-04

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Postal: Department of Economics, Monash University, Victoria 3800, Australia
Phone: +61-3-9905-2493
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Web page: http://www.buseco.monash.edu.au/eco/
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  1. Krueger, Anne O, 1974. "The Political Economy of the Rent-Seeking Society," American Economic Review, American Economic Association, vol. 64(3), pages 291-303, June.
  2. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
  3. Ram, Rati, 1986. "Government Size and Economic Growth: A New Framework and Some Evidencefrom Cross-Section and Time-Series Data," American Economic Review, American Economic Association, vol. 76(1), pages 191-203, March.
  4. Feder, Gershon, 1983. "On exports and economic growth," Journal of Development Economics, Elsevier, vol. 12(1-2), pages 59-73.
  5. Anthony Downs, 1957. "An Economic Theory of Political Action in a Democracy," Journal of Political Economy, University of Chicago Press, vol. 65, pages 135.
  6. Posner, Richard A, 1975. "The Social Costs of Monopoly and Regulation," Journal of Political Economy, University of Chicago Press, vol. 83(4), pages 807-27, August.
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