Testing the Buchanan-Wagner Hypothesis: European Evidence from Panel Unit Root and Cointegration Tests
According to the Buchanan-Wagner hypothesis, public deficits reduce the perceived price of public goods to the current generation of voters who, in turn, increase the demands for such social services. Several recent studies have attempted to test this proposition. In this paper, we apply modern time series techniques organized around panel unit root and panel cointegration to draw sharper conclusions from the short time series that are typically available. We find that there is a long run positive relationship between government spending and government deficits for each country individually, as well as for the panel as a whole. This provides support for the BW hypothesis. We also analyze the implications for the relative productivity performance of the public and private sector, the existence of scale economies in the provision of public services, as well as the extent of crowding out effects. Copyright 2003 by Kluwer Academic Publishers
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