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How Does the Public Spending Affect Technical Efficiency? Some Evidence from 15 European Countries

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Abstract

The relationship between government size and economic growth has been widely debated. Departing from this issue, we provide an empirical analysis of the impact of government size on technical efficiency. The aim of this paper is to estimate by using a True Random Effect model the impact of public sector’s size and of public expenditure components on 15 European countries’ technical efficiency from 1996 to 2011. Using the total public expenditure as a proxy for the government size we estimate simultaneously national optimal production function and technical efficiency model by controlling for income distribution and institutional quality. Our main findings show that the effect of public sector’s size on efficiency is positive while the type of public expenditures may have both positive and negative impact. In more details, results suggest that social protection, cultural, and health expenditures have a positive effect on technical efficiency, while others have a negative impact. More controversial is the impact of education expenditure, even if a positive effect on efficiency prevails when controlling for heteroscedasticity.

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  • Sabrina Auci & Laura Castellucci & Manuela Coromaldi, 2019. "How Does the Public Spending Affect Technical Efficiency? Some Evidence from 15 European Countries," CEIS Research Paper 476, Tor Vergata University, CEIS, revised 02 Dec 2019.
    • Handle: RePEc:rtv:ceisrp:476
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    2. Andrew Phiri & Chuma Mbaleki & Christian Nsiah, 2022. "Fiscal expenditures, revenues and labour productivity in South Africa," Cogent Economics & Finance, Taylor & Francis Journals, vol. 10(1), pages 2062912-206, December.
    3. Igor Fedotenkov & Rangan Gupta, 2021. "The effects of public expenditures on labour productivity in Europe," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 48(4), pages 845-874, November.
    4. Boikos, Spyridon & Bucci, Alberto, 2024. "The asymmetric impact of leisure externalities on economic growth," The Journal of Economic Asymmetries, Elsevier, vol. 30(C).

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    Keywords

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    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • H10 - Public Economics - - Structure and Scope of Government - - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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