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Title: Public Goods, Merit Goods, and the Relation Between Private and Government Consumption

Author(s): Riccardo Fiorito and Tryphon Kollintzas

Publication Date: November 2002

Keyword(s): dynamic panel estimation, government consumption, merit goods and public goods

Programme Area(s): International Macroeconomics

Abstract: In this Paper, we investigate the relation between public and private consumption, by constructing a general government spending dataset, by function, for twelve European Union countries. In particular, we split government consumption into two categories. The first category includes defence, public order, and justice ('public goods'). The second category includes health, education, and other services that could have been provided privately ('merit goods'). Equations from a relatively general theoretical model of household behaviour are estimated by GMM. The estimates are fairly robust in showing that public goods substitute, while merit goods complement, private consumption, and that the relation between merit goods and private goods is stronger than that between public goods and private goods. So that, in the aggregate, government and private consumption are complements. It also suggests that the potential calibration/estimation bias by ignoring the composition of government consumption might be substantial.

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Bibliographic Reference

Fiorito, R and Kollintzas, T. 2002. 'Public Goods, Merit Goods, and the Relation Between Private and Government Consumption'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=3617