Elasticity of Substitution, Capital Inflow and Government Size

A number of recent studies have attempted to identify the determinants of government size. It is well known that the size of government has implications for welfare and economic growth. This paper shows that the size of the fixed cost involving public good provision affects the magnitude of capital inflow induced changes in government size and welfare. By making use of a simulation exercise, it is argued that capital inflow can decrease (increase) the size of government and welfare if the elasticity of substitution is sufficiently large (small).