1 Department of Economics and Business Economics, Aarhus BSS, Aarhus University2 Department of Economics and Business Economics - The Tuborg Research Centre for Globalisation and Firms, Department of Economics and Business Economics, Aarhus BSS, Aarhus University3 Research Institute of Industrial Economics (IFN) and University of Economics in Prague4 Anglo-American University5 Department of Economics and Business Economics, Aarhus BSS, Aarhus University
While previous research documents a negative relationship between government size and economic growth, suggesting an economic cost of big government, a given government size generally affects growth differently in different countries. As a possible explanation of this differential effect, we explore whether government legitimacy (measured by satisfaction with the way democracy works) influences how a certain government size affects growth. On the positive side, a government perceived as legitimate may “get away” with being big since legitimacy can affect behavioral response to, and therefore the economic growth cost of, taxation and government expenditures. On the negative side, perceived legitimacy may make voters less prone to acquire information, which in turn facilitates interest-group oriented or populist policies that harm growth. A panel-data analysis of up to 30 developed countries, in which two different measures of the size of government are interacted with government legitimacy, reveals that perceived legitimacy exacerbates a negative growth effect of government size in the long run. This could be interpreted as governments taking advantage of being regarded as legitimate in order to secure short-term support at a long-term cost to the economy.
Public Choice, 2015, Vol 162, Issue 3-4, p. 307-328
Legitimacy; Economic growth; Size of government; Confidence; Trust