Friday, October 5, 2012: 9:20 AM
This paper uncovers a robust effect of the urbanization rate on government spending, with population size playing only a minor role. We extend Alesina
and Wacziarg's (1998) theoretical analysis and predict a positive effect of the urbanization rate on government size, while agreeing with their theoretical findings regarding the ambiguity of population size as a possible determinant of government size. Our panel data analysis of 161 countries confirms this prediction: urbanization causes higher government spending, whereas the negative effect of population size appears much weaker. We observe a strong positive effect of urbanization on the size of government, especially for the OECD countries, Asia, and Eastern Europe. Our results are robust to the inclusion of various control variables, fixed effects, dynamic estimations, and the removal of outliers, influential observations or small nations.
and Wacziarg's (1998) theoretical analysis and predict a positive effect of the urbanization rate on government size, while agreeing with their theoretical findings regarding the ambiguity of population size as a possible determinant of government size. Our panel data analysis of 161 countries confirms this prediction: urbanization causes higher government spending, whereas the negative effect of population size appears much weaker. We observe a strong positive effect of urbanization on the size of government, especially for the OECD countries, Asia, and Eastern Europe. Our results are robust to the inclusion of various control variables, fixed effects, dynamic estimations, and the removal of outliers, influential observations or small nations.