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Tracing the Link between Government Size and Growth: The Role of Public Sector Quality

Authors

  • Daniel Oto-Peralías,

    1. Universidad Pablo de Olavide, Departamento de Economía, Métodos Cuantitativos e Historia Económica, Seville, Spain
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  • Diego Romero-Ávila

    Corresponding author
    • Universidad Pablo de Olavide, Departamento de Economía, Métodos Cuantitativos e Historia Económica, Seville, Spain
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    • We thank Luis Ángeles, Jesús Crespo-Cuaresma, Miguel León-Ledesma, Elias Soukiazis and conference participants at the 14th INFER Annual Conference held in Coimbra for comments. We are thankful to the 14th INFER Annual Conference Committee for granting the INFER Joint Research Prize to this article. The authors are particularly indebted to Alois Stutzer (Editor) and two anonymous referees of this Journal for valuable comments and suggestions that led to a substantial improvement of the original manuscript. The authors acknowledge financial support from the Spanish Ministry of Science and Technology through grant ECO2009-13357, from the Spanish Ministry of Economics and Competitiveness through grant ECO2012-35430 and from the Andalusian Council of Innovation and Science under Excellence Project SEJ-4546.

Corresponding author: Diego Romero-Ávila. Universidad Pablo de Olavide, Departamento de Economía, Métodos Cuantitativos e Historia Económica, Carretera de Utrera, Km. 1, Seville, 41013, Spain. Tel. +34 954348381, Fax. +34 954349339, E-mail: dromtor@upo.es.

Summary

This paper shows evidence of strong heterogeneity in the relationship between government size and growth, depending on the quality of public sector institutions. Focusing on a wide sample of developed and developing countries over the period 1981–2005, we find that government size reduces growth when bureaucracy quality is low, whereas no significant effect is observed for sufficiently high levels of bureaucracy quality. The results hold both in cross-section and panel data analyses and are robust to a large number of robustness checks. These findings have important implications for assessing the role of government size in economic growth.

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