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A supply-demand model of public sector size

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  • Fedotenkov, Igor
  • Idrisov, Georgy

Abstract

We develop a supply-demand model for the public sector with a political equilibrium. The model considers the inefficiencies caused by taxes and includes costs associated with the provision of public goods to consumers. We show that the size of the public sector may depend on the median voter's income, population size, costs associated with paying tax, and quality of institutions, all of which reflect the costs of provisioning public goods. The estimates for the Organisation for Economic Co-operation and Development member countries are compatible with theoretical predictions; however, they do not confirm Wagner's law, which holds that the public sector share does not grow with an increase in income. A greater dependency ratio and the Gini coefficient increase demand for redistribution policies. Greater government effectiveness is a supply-side factor that increases the public sector's share in an economy.

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  • Fedotenkov, Igor & Idrisov, Georgy, 2021. "A supply-demand model of public sector size," Economic Systems, Elsevier, vol. 45(2).
    • Handle: RePEc:eee:ecosys:v:45:y:2021:i:2:s0939362521000170
    DOI: 10.1016/j.ecosys.2021.100869
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    More about this item

    Keywords

    Size of public sector; Tax burden; Median voter; Wagner's law; Political equilibrium;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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