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Is the Government Failure Theory Still Relevant? A panel analysis using US state level data


  • Yoshiho Matsunaga
  • Naoto Yamauchi


The purpose of this paper is to empirically examine the robustness of the government failure theory. A core feature of the government failure theory is demand heterogeneity. Previous studies have brought into question the robustness of the government failure theory, due to inconsistent results concerning the explanatory power of demand heterogeneity. Therefore, in this paper we revisit this important research agenda using US state level panel data. We find the two‐way fixed effects model a suitable model for testing the government failure theory's robustness and present findings which indicate that observable demand heterogeneity has a positive effect on the size of the nonprofit sector. This paper also empirically examines the relevance of the complementary financing hypothesis in terms of the cooperative nature of the governmental and nonprofit sector relationship; that is where governments delegate the production of quasi‐public goods to the nonprofit sector.

Suggested Citation

  • Yoshiho Matsunaga & Naoto Yamauchi, 2004. "Is the Government Failure Theory Still Relevant? A panel analysis using US state level data," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 75(2), pages 227-263, June.
  • Handle: RePEc:bla:annpce:v:75:y:2004:i:2:p:227-263
    DOI: 10.1111/j.1467-8292.2004.00251.x

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    References listed on IDEAS

    1. Kanika Kapur & Burton A. Weisbrod, 2000. "The Roles of Government and Nonprofit Suppliers in Mixed Industries," Public Finance Review, , vol. 28(4), pages 275-308, July.
    2. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
    3. Moulton, Brent R, 1987. "Diagnostics for Group Effects in Regression Analysis," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(2), pages 275-282, April.
    4. Moulton, Brent R., 1986. "Random group effects and the precision of regression estimates," Journal of Econometrics, Elsevier, vol. 32(3), pages 385-397, August.
    5. Carmen Marcuello, 1998. "Determinants of the Non-profit Sector Size: An Empirical Analysis in Spain," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 69(2), pages 175-192, June.
    6. Richard G. Frank & David S. Salkever, 1994. "Nonprofit Organizations in the Health Sector," Journal of Economic Perspectives, American Economic Association, vol. 8(4), pages 129-144, Fall.
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    Cited by:

    1. Beaton Erynn & Hwang Hyunseok, 2017. "Increasing the Size of the Pie: The Impact of Crowding on Nonprofit Sector Resources," Nonprofit Policy Forum, De Gruyter, vol. 8(3), pages 211-235, September.
    2. Ashlyn Aiko Nelson & Beth Gazley, 2014. "The Rise of School-Supporting Nonprofits," Education Finance and Policy, MIT Press, vol. 9(4), pages 541-566, October.
    3. Avner Ben-Ner, 2006. "For-Profit, State and Non-Profit: How to Cut the Pie Among the Three Sectors," Chapters, in: Jean-Philippe Touffut (ed.),Advancing Public Goods, chapter 2, Edward Elgar Publishing.
    4. Ashley Shena, 2014. "The Impact of Government Funding on Competition in the Nonprofit Sector: An Integrative Model and Review of Empirical Research," Nonprofit Policy Forum, De Gruyter, vol. 5(2), pages 1-17, October.
    5. Barbetta Gian Paolo & Canino Paolo & Cima Stefano & Verrecchia Flavio, 2018. "Entry and Exit of Nonprofit Organizations: National, Sectorial, and Geographic Trends with Italian Census Data," Nonprofit Policy Forum, De Gruyter, vol. 9(2), pages 1-12, June.
    6. Antonio PICCIOTTI & Andrea BERNARDONI & Massimo COSSIGNANI & Luca FERRUCCI, 2014. "Social Cooperatives In Italy: Economic Antecedents And Regional Distribution," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 85(2), pages 213-231, June.
    7. Searing Elizabeth A. M., 2014. "Charitable (Anti)Trust: The Role of Antitrust Regulation in the Nonprofit Sector," Nonprofit Policy Forum, De Gruyter, vol. 5(2), pages 1-28, October.

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