Beyond the demand: the importance of supply-side and institutional factors in the growth of governments

Abstract

Traditional empirical studies on the growth of government focus on the demandside, or, alternatively, build multivariate models based on several possible explanations. The demand-side alone has difficulty explaining the growth of government, on the other hand, multivariate estimates have the drawback that, given the scarce availability of time-series observations on public expenditure, they have low degrees of freedom. The method of analysis proposed here consists of considering a parsimonious model that includes the supply-side and the institutional framework as further explanatory variables for the growth of government. Empirical testing for Italy shows the existence of a long-run relationship between general government expenditure and domestic product only when the proposed model is enhanced by a measure of bureaucratic power and by an institutional factor that captures the division of competencies between local and central government in allocating public expenditure.