Government Size, the Role of Commitments*
| Published date | 01 August 2012 |
| DOI | http://doi.org/10.1111/j.1468-0084.2011.00661.x |
| Author | Salvatore Modica,Giuseppe Albanese |
| Date | 01 August 2012 |
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©Blackwell Publishing Ltd and the Department of Economics, University of Oxford 2011. Published by Blackwell Publishing Ltd,
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OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 74, 4 (2012) 0305-9049
doi: 10.1111/j.1468-0084.2011.00661.x
Government Size, the Role of Commitments*
Giuseppe Albanese† and Salvatore Modica‡
†Bank of Italy, Economic Research Unit – Catanzaro Branch, Largo Serravalle 1,
88100 Catanzaro, Italy (e-mail: giuseppe.albanese@bancaditalia.it)
‡Facoltà di Economia, Università di Palermo, Viale delle Scienze, 90100 Palermo, Italy
(e-mail:modica@unipa.it)
Abstract
We explore the hypothesis that long-term commitments affect the dynamics of govern-
ment expenditure. With the aid of a simple median-voter model we interpret the pattern of
increasing-then-constant tax rates observed in OECD countries in the second half of the
last century: persistence of public expenditure and a lower bound on new interventions will
push government size upward, and preferences of the electorate put a halt to this growth
at some point. In this view, the fiscal policy variable is seen to consist of only a part of the
total expenditure, the rest being predetermined by its past level.
I. Introduction
For most countries for which data exist the share of government in GDP has grown since
the 19th century until around the 1980s, and remained constant or slightly decreased there-
after. Extensive recollections and analysis of the relevant facts are contained in the books
by Tanzi and Schuknecht (2000) and Lindert (2004). To make a long story short, the first
noticeable rise occurs from 1880 to the 1930s; then came the years around World War II,
with the obvious impact of military outlays; and finally a widespread sharp acceleration
in government interventions starting around 1960 took, in three decades, the share of the
public sector to the levels we observe today.
Given the wealth increase occurred throughout the 19th century there is little doubt
that expansion of the voting franchise has played a major role in the increase in social
spending and public good provision in the 1880–1930 phase.1Skipping the war years,
more complex becomes the task of explaining the post-war boom, on which the present
paper concentrates. A critical analysis of theories and data is offered by Mueller (2003).
To shorten another long story, and referring the reader to the cited book for a compre-
hensive list of references, the two main alternative approaches to the study of government
ÅWe thank Hashem Pesaran, Nicola Persico, seminar participants at CSEF, Petralia SopranaApplied Economics
workshop, Bank of Italy and an anonymous referee. Modica gratefully acknowledges financial contribution from
MIUR, Italy.Any opinions expressed are solely those of the authors.
JEL Classification numbers: H1, H5, N4.
1Qualifications concerning tax collection effectiveness apply, see Aidt and Jensen (2009) and Aidt, Dutta and
Loukoianova (2006).
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