Empirical Public Economics
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Edited by Attiat F. Ott and Richard J. Cebula
Chapter 4: Wagner’s Hypothesis: New Evidence from the US Using the Bounds Testing Approach
4 Wagner’s hypothesis: new evidence from the US using the bounds testing approach 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...
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