Discussion Paper Series, Wilfried-Guth-Stiftungsprofessur für Ordnungs- und Wettbewerbspolitik 2018-03
We examine the effect of population size on government size for a panel of 130 countries for the period between 1970 and 2014. We show that previous analyses of the nexus between population size and government size were incorrectly specified, not accounting for cross-sectional dependence, non-stationarity and cointegration as well as parameter heterogeneity. Using a panel time-series approach that adequately models these issues, we find that population size has a positive long-run effect on government size. This finding suggests that the detrimental effects of population size on government size (primarily due to a greater risk of social conflict) dominate its beneficial ones (primarily due to scale economies). We also show that population size increases government size especially in countries that are vulnerable to social conflict due to ethnic heterogeneity.
government size country size social conflict ethnic fractionalization non-stationarity cross-sectional dependence panel cointegration parameter heterogeneity