Institutional quality and public spending in Europe: A quantile regression approach

Abstract

We appraise the effects of institutional quality on public spending for a set of 27 European countries and 18 Euro-area economies over the 1996–2017 period. While institutions play a weak role in affecting spending once the fixed-effects model is employed, the application of the quantile regression indicates that improved institutional quality mitigates public spending, although the effects crucially depend on the distribution of public expenditure and the sample examined. For both the Euro-area sample and the full sample, we show that better quality of institutions reduces public spending, although the effects become less significant the higher the levels of public spending. Further, for the Euro-area sample, institutions appear to have a stronger role in mitigating public spending. Several robustness tests confirm our findings.