41. Firm Profits and Government Activity: An Empirical Investigation
- Author:
- Petar Jolakoski, Branimir Jovanovic, Joana Madjoska, Viktor Stojkoski, and Dragan Tevdovski
- Publication Date:
- 02-2021
- Content Type:
- Working Paper
- Institution:
- The Vienna Institute for International Economic Studies (WIIW)
- Abstract:
- If firm profits rise to a level far above than what would have been earned in a competitive economy, this might give the firms market power, which might in turn influence the activity of the government. In this paper, we perform a detailed empirical study on the potential effects of firm profits and markups on government size and effectiveness. Using data on 30 European countries for a period of 17 years and an instrumental variables approach, we find that there exists a robust relationship between firm gains and the activity of the state, in the sense that higher firm profits reduce government size and effectiveness. Even in a group of developed countries, such as the European countries, firm power may affect state activity.
- Topic:
- Development, Economics, Government, International Political Economy, and Profit
- Political Geography:
- Europe and Global Focus