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Interdependence of government expenditure among European countries: Productivity spillover and strategic interaction

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  • Xiaodong Chen
  • Haoming Mi
  • Peng Zhou

Abstract

We build an endogenous growth model that distinguishes productive and welfare government expenditures and embeds fiscal externalities. The model yields three testable hypotheses: (i) productive expenditure raises growth (Barro effect); (ii) productive expenditure generates cross‐country productivity spillovers; (iii) government expenditure structure exhibits spatial dependence. Estimation with a spatial‐panel dataset for 30 European economies (EU27 + 3) corroborates all three hypotheses. We further show that positive productivity externalities induce an international free‐rider problem, causing systematic under‐investment in productive expenditure, while negative welfare externalities trigger a “welfare tournament” and over‐spending on non‐productive expenditure.

Suggested Citation

  • Xiaodong Chen & Haoming Mi & Peng Zhou, 2026. "Interdependence of government expenditure among European countries: Productivity spillover and strategic interaction," Economic Inquiry, Western Economic Association International, vol. 64(2), pages 681-701, April.
    • Handle: RePEc:bla:ecinqu:v:64:y:2026:i:2:p:681-701
    DOI: 10.1111/ecin.70032
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