Determinants of the size of government in high-income countries

This paper empirically assesses the determinants of the share of government consumption in the GDP in high-income countries at two points in time, namely the year 2000 and 2014 while taking into consideration the major issue of potential simultaneity bias by introducing interaction variables. Based on data from the World Bank and using a sample of twenty-six high-income economies in 2000, we find that the share of government consumption in the GDP growth is dependent upon the log of population, its square, the log of the labor force, and interaction terms between the square of the log of the labor force and the log of population, between the log of the labor force and its square, and between the log of population and the log of the labor force. For the year 2014 and using a sample of forty-five high-income countries we find that the size of government as measured by the ratio of government consumption in the GDP is dependent upon the log of per capita gross national income, the log of the labor force, the log of population, the log of urbanization (measured as the share of the urban population in the total population), and the interaction terms between the log of per capita gross income and that of urbanization, the log of urbanization and that of the labor force, and between the log of urbanization and that of population. Statistical results of such empirical examination will contribute towards a better understanding of the determinants of the size of government in high-income economies. Data for all variables are from the 2016 World Development Indicators. We specify and estimate a semi log and quadratic model and observe that some coefficient estimates do not have the expected sign due to possible collinearity among some independent variables.