Firm Profits and Government Activity: An Empirical Investigation

32 Pages Posted: 26 Oct 2020

See all articles by Dragan Tevdovski

Dragan Tevdovski

Ss. Cyril and Methodius University

Joana Madjoska

National Bank of the Republic of Macedonia

Petar Jolakoski

Ss. Cyril and Methodius University - Faculty of Economics

Branimir Jovanovic

affiliation not provided to SSRN

Viktor Stojkoski

Ss. Cyril and Methodius University - Faculty of Economics

Date Written: August 18, 2020

Abstract

Recent studies suggest that firm profits have risen to a level far above than what would have been earned in a competitive economy. It has been hypothesized that these profits, generated by market power, allow firms to influence the activity of the government. However, despite an abundance of theoretical investigations, the empirical examinations for the validity of this hypothesis have been largely neglected. Against this background, here 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 and stable negative relationship between firm gains and the activity of the state. Our results indicate that, even in such a homogeneous group of countries, firm power may dictate the decline in state activity and, successively, lead to emergence and persistence of inefficient states.

Keywords: government size, government effectiveness, firm profits

JEL Classification: H11

Suggested Citation

Tevdovski, Dragan and Madjoska, Joana and Jolakoski, Petar and Jovanovic, Branimir and Stojkoski, Viktor, Firm Profits and Government Activity: An Empirical Investigation (August 18, 2020). Available at SSRN: https://ssrn.com/abstract=3676649 or http://dx.doi.org/10.2139/ssrn.3676649

Dragan Tevdovski

Ss. Cyril and Methodius University ( email )

blvd. Goce Delcev 9
Skopje, 1000
Macedonia

Joana Madjoska

National Bank of the Republic of Macedonia ( email )

Skopje, 1000
Macedonia

Petar Jolakoski

Ss. Cyril and Methodius University - Faculty of Economics ( email )

Skopje
Macedonia

Branimir Jovanovic

affiliation not provided to SSRN

Viktor Stojkoski (Contact Author)

Ss. Cyril and Methodius University - Faculty of Economics ( email )

Skopje
Macedonia

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