Does Institutional Quality And Political Competition Matter? Empirical Evidences From Developed And Developing Countries
By using panel data analysis for 88 developed and developing countries around the globe the study estimates the impact of institutional quality and political competition on public sector size. Dynamic panel estimation technique is adopted to control for the persistence in the public sector size data over a period of 1984 – 2010. In the presence of some the leading theory on determinants of public sector size, the study finds that higher institutional quality reduces the size of the public sector. The reduction in the size of the public sector due to an improvement of institutional quality is based on the philosophy that private sector would substitute the public sector if there is prevalence of law and order in economies around the world. Secondly, the study finds evidence of increased level of political competition reducing the size of the public sector. The study uses institutional quality data from International Country Risk Guide (ICRG) and the data on political competition is obtained from Database of Political Institutions. The central insight of the study is built around the institutional quality variables. To take into account the slow changing variable of institutional quality the dynamic panel estimator is used for both annual and four year moving averages data.