Cost disease in defense and public administration: Baumol and politics

Author
Borge, Lars-Erik
Hove, Kjetil Hatlebakk
Lillekvelland, Tobias
Tovmo, Per
Date Issued
2018
Keywords
Offentlig forvaltning
Kostnadsvekst
Forsvaret
Permalink
http://hdl.handle.net/20.500.12242/872
https://ffi-publikasjoner.archive.knowledgearc.net/handle/20.500.12242/872
DOI
10.1007/s11127-018-0510-z
Collection
Articles
Description
Borge, Lars-Erik; Hove, Kjetil Hatlebakk; Lillekvelland, Tobias; Tovmo, Per. Cost disease in defense and public administration: Baumol and politics. Public Choice 2018 ;Volum 175.(1-2) s. 1-18
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Abstract
William Baumol’s model predicts a steady increase in relative public sector prices (or costs) because of the combination of slow productivity growth and wage growth similar to sectors wherein productivity is growing more quickly. In this paper, we extend the Baumol model with political variables and analyze price growth in defense and public administration using Norwegian data. We find strong support for the mechanism of the Baumol model since manufacturing productivity is the most important determinant of relative public-sector prices. Greater political fragmentation has also contributed to the price growth, but its quantitative effect is smaller than that of manufacturing productivity. An analysis of a labor-intensive private service (restaurants and cafes) supports the broader relevance of the Baumol mechanism and the validity of the estimated effect of political fragmentation on the two sectors considered herein.
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