“Regional Income Disparity and the Size of the Public Sector”

This paper explores the impact of income inequality between jurisdictions on government decision making affecting the size of the public sector. We model policy choices as the outcome of regional representatives' negotiations in the legislature. We show that the more unequal interregional income distribution is, the greater the underprovision of public goods. More specifically, greater interregional income disparity leads to a smaller public sector. A wealthier economy as a result may have a relatively smaller government size when income disparity increases.