A theoretical and empirical analysis of the Wagner hypothesis of public expenditure growth

The debate over the role and the size of state activity in public economics remains controversial despite more than a century of active research. As a result, several explanations have been suggested to explain the expansion of the size of the public economy and a large amount of literature has been produced. In the late 19th century, the German economist Adolph Wagner predicted that economic development would be accompanied by a relative growth in the public sector. This thesis argues that the way the Wagner Hypothesis has been interpreted in the existing literature has been incomplete both on theoretical and empirical grounds. Data shows that the independent variable is an important determinant of the growth of government share in income. This result is generally consistent with the WH and lends support to the logistic and the Gompertz processes of government growth. Following discussion, the principal conclusion is that the rise of the share of government expenditure in income in the cross section sample of 88 countries can be partly explained by the changes in the levels of real GDP per capita for those countries. The thesis concludes with a discussion of some of the implications of these results and suggestions for further research