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Democracy and government spending

Balamatsias, Pavlos (2018): Democracy and government spending.

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Abstract

In this paper, we argue that democracies increase government expenditure because they produce more public goods with the taxes they collect, while autocracies use taxes as rents. In order to test this hypothesis we use data on 61 countries from 1993 to 2012. As our main independent variable we employ a dichotomous democracy measure, based on the theory of regional democratization waves developed by Huntington (1991) and used in Acemoglu, et al. (2014) and Balamatsias (2017a). Our results using a number of estimations show us that democratization waves positively affect democracy. Furthermore, our 2SLS, OLS, fixed effects and GMM estimations show us that democracy increases spending on public goods and education. When controlling for a dataset without African and Middle-eastern countries our first-stage results remain the same and the effect on spending is now quantitatively bigger suggesting wealthier democracies produce more public goods, compared to poorer ones. In addition when using a sample of non-OECD countries we find that democracy does not affect spending, further substantiating our hypothesis that democracy increases government expenditures but mostly on wealthier democracies.

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