Intra-national risk-sharing and government sizes: evidence from nonlinear regression

Abstract

This article investigates the effects of government sizes on the cyclical elasticity coefficient. Theory of intra-national risk-sharing evaluates the effects of the cyclical sensitivity of taxes to income fluctuation across US states. Because government size is a proxy for automatic stabilizer, which captures the relevant differences of fiscal variables at the state level; hence, the cyclical sensitivity may differ across various magnitudes of local government. We employ two nonlinear econometric methods: threshold regression of panel data (Hansen, 1999) and semi-parametric smooth-coefficient regression of cross-sectional data (Koop and Tobias, 2006). Evidence from a panel of 50 US states supports a positive relationship between government size and intra-national risk-sharing.

Notes

¹ Measured as FTaxes-to-GSP ratio, the numerator includes Federal income taxes and Federal transfers.

² For earlier reference, please see Asdrubali et al. (1996).