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The Elgar Companion to Public Economics

Empirical Public Economics

Edited by Attiat F. Ott and Richard J. Cebula

Attiat Ott and Richard Cebula have recognised the need to present, in an accessible and straightforward way, the voluminous literature in the public economics arena. Advances in econometric techniques and the spillover of knowledge from other disciplines made it difficult, not only for students but also for lecturers, to accurately find the information they need.
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Chapter 4: Wagner’s Hypothesis: New Evidence from the US Using the Bounds Testing Approach

James E. Payne, Bradley T. Ewing and Hassan Mohammadi


James E. Payne, Bradley T. Ewing and Hassan Mohammadi 1 Introduction The economic and political reasons for the growth of government have been intensely examined by researchers.1 The presumption that the expansion in public sector expenditures is positively related to the level of economic development, known as Wagner’s hypothesis (or law), has undergone intense investigation. Over a century ago, the German economist, Adolph Wagner, made the observation that as a country’s level of economic development expands so does the relative size of its public sector.2 Wagner provided several reasons for this observation. First, industrialization would generate an increase in the division of labor and urbanization, resulting in larger expenditures on contractual enforcement and regulatory activities. Second, real income growth would translate into the growth of income-elastic cultural and welfare expenditures. Third, the government would complement private sector funding for long-term investments as a result of economic development and changes in technology. There have been numerous interpretations of Wagner’s hypothesis with respect to formulating testable specifications.3 The literature offers at least five specifications of Wagner’s hypothesis – the most familiar are the Peacock–Wiseman and the Musgrave versions. In what follows, we provide in section 2, a brief overview of Wagner’s hypothesis, empirical specification and findings. In section 3 we shall raise several issues relating to structuring the hypothesis and provide an alternative econometric procedure. Data, methodology and results are given in this section. Section 4 provides concluding remarks. 2 Wagner’s hypothesis The five widely cited specifications of...

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