Theory and econometric evidence explaining public expenditure: the case of Iran

The purpose of this paper is to analyse government expenditure in Iran using annual time series data for the period 1963-2000. Various theories of the size of government are reviewed and a distinction is made between economic/structural determinants and institutional determinants. Categorising the theories of government expenditure in this way suggests the application of non-nested tests as a mechanism whereby the relative importance of the two broad theoretical categories can be determined. The empirical results, indicating "double rejection", reveal that neither the economic/structural determinants nor the institutional determinants alone are sufficient to explain government expenditure in Iran. A comprehensive, incorporating explanatory variables from both models provides a robust explanation of the data. This paper presents the first empirical estimates of the own-price elasticity of the demand, and income elasticity of the demand, for current government expenditures in Iran.