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Government size, corruption, and tax policy can influence allocation towards necessity or opportunity-driven entrepreneurship. Using a comparative multi-source sample across 52 countries during 2005–2015, we apply a mixed-process estimation of the simultaneously unrelated system of equations and unpack these heterogeneous and complex effects. Interestingly, our results show that the influence of tax policy and corruption on necessity and opportunity entrepreneurship depends on government size. Our results hold for numerous robustness analyses. Institutions matter for the choice of opportunity and necessity-driven entrepreneurship. Government size, the level of corruption, and tax policy directly affect entrepreneurs’ motivation and incentives. We study 52 countries during 2005–2015 to find out to what extent tax rate, corruption, and a range of government expenditure change the allocation of necessity and opportunity entrepreneurship. Our main implications are for (1) Research: Formal and informal institutions need to be considered when studying entrepreneurship allocation, particularly in an emerging and developing country context. Results suggest that the impact of the same institutional settings and informal institutions such as corruption on necessity and opportunity entrepreneurship is not uniform in size and scope and have different magnitude. The effect of government expenditure on necessity and opportunity entrepreneurship is not ubiquitous. (2) Management: The broader institutional context affects allocation of entrepreneurship, and potential entrepreneurs can consider how corruption in particular can affect them. (3) Policy: Policymakerscan measure the extent to which opportunity and necessity entrepreneurship are likely to change, when they make changes to tax policy, resources for public spending, and take anti-corruption measures.

Economists generally assume that the state has sufficient institutional capacity to support markets and levy taxes. This paper develops a framework where \"policy choices\" in market regulation and taxation are constrained by past investments in legal and fiscal capacity. It studies the economic and political determinants of such investments, demonstrating that legal and fiscal capacity are typically complements. The results show that, among other things, common interest public goods, such as fighting external wars, as well as political stability and inclusive political institutions, are conducive to building state capacity. Some correlations in cross-country data are consistent with the theory.

We explore the country-specific institutional characteristics likely to influence an individual's decision to become an entrepreneur. We focus on the size of the government, on freedom from corruption and on \"market freedom\" defined as a cluster of variables related to protection of property rights and regulation. We test these relationships by combining country-level institutional indicators for 47 countries with working-age population survey data taken from the Global Entrepreneurship Monitor. Our results indicate that entrepreneurial entry is inversely related to the size of the government, and more weakly to the extent of corruption. A cluster of institutional indicators representing \"market freedom\" is only significant in some specifications. Freedom from corruption is significantly related to entrepreneurial entry, especially when the richest countries are removed from the sample, but unlike the size of government, the results on corruption are not confirmed by country-level fixed-effects models.

The absence of state capacities to raise revenue and to support markets is a key factor in explaining the persistence of weak states. This paper reports on an ongoing project to investigate the incentive to invest in such capacities. The paper sets out a simple analytical structure in which state capacities are modeled as forward looking investments by government. The approach highlights some determinants of state building including the risk of external or internal conflict, the degree of political instability, and dependence on natural resources. Throughout, we link these state capacity investments to patterns of development and growth.

Die Staatsquote in Deutschland ist seit 2019 deutlich angestiegen und erreicht trotz wirtschaftlicher Stagnation inzwischen mehr als 50 % des BIP. Diese Ausgabendynamik ist vor allem auf wachsende Sozialausgaben, steigende Zinslasten und höhere Vermögenstransfers zurückzuführen und führt inzwischen zu anhaltenden Defiziten, die auch durch europäische Ausnahmeregelungen nur temporär abgefedert werden. Gleichzeitig ist absehbar, dass mittelfristig erhebliche Erhöhungen der Abgabenquote nötig werden, da eine dauerhafte Finanzierung über Neuverschuldung nicht tragfähig ist. Die Analyse macht deutlich, dass der Konsolidierungsdruck nur durch eine konsequent wachstumsorientierte Wirtschaftspolitik gemindert werden kann – denn ohne eine spürbare Belebung des Produktionspotenzials verschärfen sich fiskalische Risiken und wirtschaftliche Unsicherheiten weiter.

This paper studies the relationship between the size of a jurisdiction and how corrupt its citizens perceive officials to be. The relationship may a priori be driven by four distinct mechanisms: (i) larger communities have more officials, thereby making it more likely at least one official is corrupt; (ii) larger communities have a larger budget, thereby offering more opportunity for corruption; (iii) monitoring officials is costlier in larger communities; and (iv) the public is less likely to have contact with officials in larger communities, which raises citizens’ suspicion. First, using cross-country analysis, we establish that people perceive more corruption in countries with larger populations. We then test this stylized fact using French survey data on the perception of municipal government corruption. We again observe that the perception of corruption increases with population size. This result is robust to a series of checks and many confounding factors. Moreover, our results hold across two distinct periods and for another administrative unit, departments. Finally, we report suggestive evidence that the stylized fact is driven by mechanisms (i) and (ii), but not by (iii) and (iv).

We study the contextual role of public procurement for the effectiveness of grants-based entrepreneurship policy. Drawing on the resource-based view of the firm, we argue that partaking in procurement can erode grant effectiveness by relaxing a firm’s preexisting financial constraints and diverting managerial attention away from market-centered resource configurations. To test our hypothesis, we use detailed firm-level data from Slovenia and combine matching with difference-in-differences. When firms are not involved in procurement, all investigated types of grants meet the intended policy goals, apart from productivity growth. In contrast, when firms participate in procurement, small-business grants exhibit generally weaker effects, R&D grants fail to have any impact, and employment grants lastingly reduce firm productivity. Given that public procurement occupies a large footprint in many economies, our analysis highlights an unintended adverse by-product of big government and underscores the limits of state capitalism.Plain English SummaryThis study explores how public procurement shapes the effectiveness of grants-based entrepreneurship policy. If procurement loosens firm’s preexisting financial constraints or induces businesses to prioritize contracting with the government over other market opportunities, then public procurement could reduce the effectiveness of government grants. Empirical evidence from Slovenia supports this perspective. When firms do not partake in procurement, all examined types of grants achieve their intended policy goals, except for productivity growth. However, when firms are involved in public procurement, the effectiveness of the grants diminishes dramatically: small-business grants have weaker effects in general, R&D grants do not exert any impact, and employment grants decrease firm productivity. Thus, the principal implication of this study is that public procurement can hamper the effectiveness of grants-based entrepreneurship policy. The research also contributes to the understanding of the unintended consequences of big government and the limitations of state capitalism.

PurposeMost African countries operate large government sizes but with little corresponding economic outcomes. Institutional economics however, show that strong institution is fundamental in promoting economic growth. This study examines the linkages between government size, institutional quality and economic welfare in Africa.Design/methodology/approachThis study deploys the System Generalized Method of Moments estimation strategy on panel data of 52 African economies from 2000–2018.FindingsThe result shows that government size has a negative impact on economic welfare, while institutional quality has a positive impact on economic welfare. The interaction of government size and institutional quality shows a positive impact on economic welfare, signifying synergy and complementarity. Thus, strong institutions counteract the adverse effects of large government size on economic welfare.Practical implicationsTo promote human development and economic welfare, and attain key Sustainable Development Goals such as good health and well-being, quality education, decent work and economic growth, African policy makers need to keep their government sizes at optimal levels and promote strong institutions.Originality/valueThis paper provides first-hand empirical evidence of the relevance of institutional quality in counteracting the adverse influence of large government size in Africa. It determines the thresholds of government size and uses a composite index as proxy for same. In addition, this study uses the World Governance Indicators and the Fraser Institute Economic Freedom Index as alternative measures of institutional quality and Gross Domestic Product per capita and Human Development Index as proxies for economic welfare.Peer reviewThe peer review history for this article is available at: https://publons.com/publon/10.1108/IJSE-01-2024-0075

This study investigates the effect of government size, as measured by the tax revenue to gross domestic product (tax-GDP) ratio, on output responses to increases in government purchases. First, we show that in a standard static neoclassical model, the stimulus effect of fiscal expansion on output increases with the tax-GDP ratio. This finding is quantitatively confirmed using a dynamic neoclassical model with standard functional forms and parameter values. To empirically test the theoretical findings, we analyze the responses of macroeconomic variables to an unanticipated increase in government purchases for 12 Organisation for Economic Cooperation and Development (OECD) countries during 1985–2019 using a state-dependent local projection method. The estimation results reveal that while output responses to an unanticipated fiscal expansion are significantly positive when the tax-GDP ratio is high, they are statistically indistinguishable from zero when the ratio is low. Overall, our findings suggest that fiscal expansion can stimulate output more effectively at high tax rates, unlike the well-known predictions of the traditional Keynesian model.

Many prior studies on the government-growth nexus have focused on Keynesian (Keynes, 1936) or neoclassical (Lucas, 1990) traditions, while a recent research strand has paid widespread attention to Barro (1990)'s non-linear perspective. Although modern complexity sciences suggest an overall non-linear trend in a complicated, interconnected, globalized world, non-monotonicity is poorly addressed in the applied literature. This work explores both the linear and non-linear effects of government size on economic growth. By employing a hybrid Metropolis-Hastings algorithm within a hierarchical Bayesian approach to a panel of ASEAN countries over 1950-2019, which aids in handling statistical complexities, the results show a negative growth impact of government size. This finding aligns with the neoclassical viewpoint on bureaucratic inefficiencies and the distortionary effects of government intervention in a market economy. Substantial measures are needed to increase public spending efficiency and accountability, focus on productive investments, encourage private sector activities, and implement structural reforms in ASEAN.