Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/201831
Authors: 
Guzi, Martin
Kahanec, Martin
Year of Publication: 
2019
Series/Report no.: 
GLO Discussion Paper No. 381
Abstract: 
Expansion of the public sector and redistributive policies may reduce income inequality, but formal tests suffer from the problem of endogeneity of government size with respect to the distribution of income. Studying 30 European countries over the period 2004-2015, we apply instrumental variable estimation techniques to identify a causal relationship between income inequality and government size, measured as the government expenditure share in GDP. Using a novel instrument – the number of political parties in the ruling coalition – we find that accounting for the possible endogeneity of government size increases the magnitude of the estimated negative effects. Our findings thus suggest that much of the literature underestimates the true role of the government in attenuating income inequality. The estimated relationship between income inequality and government size persists in a series of robustness checks.
Subjects: 
inequality
redistribution
government size
instrumental variable
Gini index
JEL: 
D31
D60
H20
Document Type: 
Working Paper

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