Openness, Government Size and the Terms of Trade

By Paolo Epifani, Gino Gancia. 2009

172 citations recorded by the source corpus.

This paper investigates the relationship between trade openness and the size of governments, both theoretically and empirically. We argue that openness can increase the size of governments through two channels: (1) a terms of trade externality, whereby trade lowers the domestic cost of taxation, and (2) the demand for insurance, whereby trade raises risk and public transfers. We provide a unified framework for studying and testing these two mechanisms. Our main theoretical prediction is that the relative strength of the two explanations depends on a key parameter, namely, the elasticity of substitution between domestic and foreign goods. Moreover, while the first mechanism is inefficient from the standpoint of world welfare, the second is instead optimal. In the empirical part of the paper, we provide new evidence on the positive association between openness and government size and we explore its determinants. Consistently with the terms of trade externality channel, we show that the correlation is contingent on a low elasticity of substitution between domestic and foreign goods. Our findings raise warnings that globalization may have led to inefficiently large governments.

Subfields: Economics and Econometrics, Political Science and International Relations

View Paper: https://www.semanticscholar.org/paper/09946205ebef41f2d26ac80ce23e75fbc920d1ff

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

In Political Science and International Relations

Citations in the corpus

Urban Networks: Connecting Markets, People, and Ideas (2016, background): “For intermediate gains from variety, some regions may be tempted to free-ride on the innovation provided by the others, as in Epifani and Gancia (2009).”