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Estimating Income Elasticity of Government Expenditures: Evidence from Oil Price Shocks

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  • Gradstein, Mark
  • Chong, Alberto
  • Brückner, Markus

Abstract

We estimate the income elasticity of government expenditures using variation in the international oil price as a plausibly exogenous source of within-country variation of countries? permanent income. Our short run elasticity estimates, between 0.25-0.50, are generally somewhat smaller than the previously obtained ones, and they, in particular, indicate that Wagner?s law does not hold; long run elasticities are larger, but still smaller than unity. We also explore the correlates of the income elasticity of government spending and find no support for views that either democracy, inequality, or openness are associated with a larger elasticity. However, we find evidence consistent with ?voracity? theories: cross-country differences in ethnic polarization are associated with a significantly higher oil price driven income elasticity of government spending.

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  • Gradstein, Mark & Chong, Alberto & Brückner, Markus, 2011. "Estimating Income Elasticity of Government Expenditures: Evidence from Oil Price Shocks," CEPR Discussion Papers 8563, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:8563
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    1. Brückner, Markus & Chong, Alberto & Gradstein, Mark, 2012. "Estimating the permanent income elasticity of government expenditures: Evidence on Wagner's law based on oil price shocks," Journal of Public Economics, Elsevier, vol. 96(11), pages 1025-1035.
    2. Isiaq O. Oseni & Ibrahim A. Adekunle, 2020. "Relevance of Wagner’s Hypothesis in Achieving Sustainable Development Agenda in Nigeria," Research Africa Network Working Papers 20/006, Research Africa Network (RAN).
    3. Isiaq O. Oseni & Ibrahim A. Adekunle, 2020. "Relevance of Wagner’s Hypothesis in Achieving Sustainable Development Agenda in Nigeria," Working Papers of the African Governance and Development Institute. 20/006, African Governance and Development Institute..

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    Keywords

    Wagner law;

    JEL classification:

    • H1 - Public Economics - - Structure and Scope of Government

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