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Firm Profits and Government Activity: An Empirical Investigation

Author

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  • Petar Jolakoski
  • Branimir Jovanović

    (The Vienna Institute for International Economic Studies, wiiw)

  • Joana Madjoska
  • Viktor Stojkoski
  • Dragan Tevdovski

Abstract

If firm profits rise to a level far above than what would have been earned in a competitive economy, this might give the firms market power, which might in turn influence the activity of the government. In this paper, we perform a detailed empirical study on the potential effects of firm profits and markups on government size and effectiveness. Using data on 30 European countries for a period of 17 years and an instrumental variables approach, we find that there exists a robust relationship between firm gains and the activity of the state, in the sense that higher firm profits reduce government size and effectiveness. Even in a group of developed countries, such as the European countries, firm power may affect state activity.

Suggested Citation

  • Petar Jolakoski & Branimir Jovanović & Joana Madjoska & Viktor Stojkoski & Dragan Tevdovski, 2021. "Firm Profits and Government Activity: An Empirical Investigation," wiiw Working Papers 194, The Vienna Institute for International Economic Studies, wiiw.
  • Handle: RePEc:wii:wpaper:194
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    More about this item

    Keywords

    firm profits; government size; government effectiveness;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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