Economic outlook database

This article examines the policy consequences of the number of parties in government. We argue that parties externalize costs not borne by their support groups. Larger parties thus internalize more costs than small parties because they represent more groups. This argument implies that the public sector should be larger the more parties there are in the government coalition. We test this prediction using yearly time-series cross-sectional data from 1970 to 1998 in 17 European countries. We find that increasing the number of parties in government increases the fraction of GDP accounted for by government spending by close to half a percentage point, or more than one billion current dollars in the typical year. We find little support for the alternative claim that the number of legislative parties affects the size of the public sector, except via the number of parties in government.