Government Spending and Economic Growth in a Context of Market Imperfections

49 Pages Posted: 22 Jul 2008

See all articles by Ramón López

Ramón López

University of Maryland - Department of Agricultural & Resource Economics

Asif Islam

World Bank - Development Economics Group (DEC)

Date Written: July 12, 2008

Abstract

This paper identifies a key feature of the structure of government spending as a determinant of economic growth: the public goods/ private goods expenditure ratio, where public goods are broadly defined as expenditures that mitigate market failure. The paper develops a theoretical and empirical analysis which corroborates the hypothesis that shifting government expenditures from private goods to public goods, promotes economic efficiency and growth. The empirical analysis using data for 87 countries from 1980-2004, shows that increasing the share of public goods by one half of a standard deviation induces a one percentage point increase in the annual per capita growth rate of GDP for the average country in the sample. This result is robust to stringent sensitivity checks.

Keywords: government spending, economic growth, market imperfections, investment

JEL Classification: O40

Suggested Citation

López, Ramón and Islam, Asif Mohammed, Government Spending and Economic Growth in a Context of Market Imperfections (July 12, 2008). Available at SSRN: https://ssrn.com/abstract=1168048 or http://dx.doi.org/10.2139/ssrn.1168048

Ramón López (Contact Author)

University of Maryland - Department of Agricultural & Resource Economics ( email )

Symmons Hall, Rm 2200
University of Maryland
College Park, MD 20742-5535
United States
301-405-1281 (Phone)
301-405-9091 (Fax)

Asif Mohammed Islam

World Bank - Development Economics Group (DEC) ( email )

1818 H Street N.W.
Washington, DC 20433
United States

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