Measuring the Strength of the Theories of Government Size

This paper investigates the role of model uncertainty in explaining the different findings in the literature regarding the determinants of government expenditure and its components. In particular, we systematically assess the evidentiary support for nine different theories using a novel model averaging method that allows for endogeneity. Our results suggest that the government size and its components are explained by multiple mechanisms that work simultaneously but differ in their impact and importance. Hence, policymakers should avoid relying on any particular model to make policy decisions. More precisely, for general government total expenditure we find decisive evidence for the demography theory and a strong evidence for the globalization and political institution theory. In the case of central government total expenditure, we find that income inequality and macroeconomic policy play a decisive role in addition to demography