Does the Size of the Legislature Affect the Size of Government? Evidence from a Natural Experiment

Previous empirical studies have found a positive relationship between the size of the legislature and the size of government. Those studies, however, do not adequately address the concerns of endogeneity. In contrast, this paper exploits an exogenous variation in the size of the legislature induced by a statutory law linking council size to the number of eligible voters in Swedish local governments. The statutory law can potentially create discontinuities between number of eligible voters and council size at certain known values. These discontinuities are used to construct instrumental variable estimates of the effect of council size on government size. In contrast to previous findings, the results show that an increase of the council size leads to a statistically and economically significant decrease in spending and revenues. On average, spending and revenues are decreased by roughly 0.5-0.8 percent for each additional council member.