Explaining differences in state growth: Catching up versus Olson

In this paper we have tested various explanations for differences in rates of economic growth across states. We found no evidence consistent with Olson's hypothesis that differences in state age (a proxy for the strength of special interest groups) can explain differences in state growth. Furthermore, our results indicate that a regression containing only initial income explains most of the variation in the growth of state income. In sum, a good part of the more rapid growth of southern and other fast-growing states is simply a convergence to the national average. This convergence is an expected result of basic economic theory, given free trade in goods and factors. Our results are, however, not necessarily a rejection of the Olson hypothesis. It may well be that the hypothesis should only be applied to comparisons between nation-states, not to comparisons between political divisions of the same nation-state. The institutional and political similarities of the American states may swamp the differences and make the Olson hypothesis inapplicable. The tendencies cited by Olson may indeed be present in the American economy, but their differential effect is much too small to explain any of the variation in economic performance across states. Copyright Martinus Nijhoff Publishers 1987