DEMOGRAPHIC DIVERSITY AND THE SIZE OF THE PUBLIC-SECTOR

We investigate the possibility that diversity in income, religion, and ethnicity affects the size of a country's public sector. Public provision of goods may be inefficient in the presence of diverse preferences about public sector spending, and voters may be unwilling to finance transfer payments to people whom they perceive as different from themselves. We find that ethnic diversity discourages transfer payments by central governments, and that income diversity discourages other public expenditure.