Openness, government size and the terms of trade

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• dc.contributor.author Epifani, Paoloca
• dc.contributor.author Gancia, Gino A.ca
• dc.contributor.other Universitat Pompeu Fabra. Departament d'Economia i Empresa
• dc.date.accessioned 2017-07-26T10:50:54Z
• dc.date.available 2017-07-26T10:50:54Z
• dc.date.issued 2005-11-01
• dc.date.modified 2017-07-23T02:10:07Z
• dc.description.abstract This paper investigates the relationship between trade openness and the size of government, both theoretically and empirically. We show 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. First, we show how their relative strength depends on a key parameter, the elasticity of substitution between domestic and foreign goods. Second, while the terms of trade externality leads to inefficiently large governments, the increase in public spending due to the demand for insurance is optimal. We show that large volumes of trade may result in welfare losses if the terms of trade externality is strong enough while small volumes of trade are always beneficial. Third, we provide new evidence on the positive association between openness and the size of government and test whether it is consistent with the terms of trade externality or the demand for insurance. Our findings suggest that the positive relationship is remarkably robust and that the terms of trade externality may be the driving force behind it, thus raising warnings that globalization may have led to inefficiently large governments.
• dc.format.mimetype application/pdfca
• dc.identifier https://econ-papers.upf.edu/ca/paper.php?id=915
• dc.identifier.citation The Review of Economic Studies, 76, 629-668, 2009
• dc.identifier.uri http://hdl.handle.net/10230/842
• dc.language.iso eng
• dc.relation.ispartofseries Economics and Business Working Papers Series; 915
• dc.rights L'accés als continguts d'aquest document queda condicionat a l'acceptació de les condicions d'ús establertes per la següent llicència Creative Commons
• dc.rights.accessRights info:eu-repo/semantics/openAccess
• dc.rights.uri http://creativecommons.org/licenses/by-nc-nd/3.0/es/
• dc.subject.keyword openness
• dc.subject.keyword government size
• dc.subject.keyword terms of trade externality
• dc.subject.keyword elasticity of substitution between imports and exports
• dc.subject.keyword Macroeconomics and International Economics
• dc.title Openness, government size and the terms of tradeca
• dc.type info:eu-repo/semantics/workingPaper