TY  - RPRT
        AU  - Guzi, Martin
AU  - Kahanec, Martin
        TI  - Income Inequality and the Size of Government: A Causal Analysis
        PY  - 2018/Dec/
        PB  - Institute of Labor Economics (IZA)
        CY  - Bonn
        T2  - IZA Discussion Paper
        IS  - 12015
        UR  - https://www.iza.org/publications/dp12015
        AB  - Expansion of the public sector and redistributive policies may reduce income inequality, but formal tests suffer from the problem of endogeneity of government size with respect to the distribution of income. Studying 30 European countries over the period 2004-2015, we apply instrumental variable estimation techniques to identify a causal relationship between income inequality and government size, measured as the government expenditure share in GDP. Using a novel instrument – the number of political parties in the ruling coalition – we find that accounting for the possible endogeneity of government size increases the magnitude of the estimated negative effects. Our findings thus suggest that much of the literature underestimates the true role of the government in attenuating income inequality. The estimated relationship between income inequality and government size persists in a series of robustness checks.
        KW  - inequality
KW  - redistribution
KW  - government size
KW  - instrumental variable
KW  - Gini Index
        ER  -