Non-Linear Effect of Urbanization on Public Sector Expenditure: STR Model Approach

This study examines the nonlinear impact of urbanization on public sector expenditure in Iran during the years of 1960-2014. For this purpose, is used the Smooth Transition Regression model (STR) as one of the most prominent regime-switching models. The estimated STR model supports a nonlinear threshold behavior in the relationship between urbanization and public sector expenditure in the country in a two regime structures with a threshold (optimum) level of about 55.28%. In the first regime, urbanization has a negative impact on public sector expenditure, because of positive external consequences and economies of scale in the production of public goods, but after crossing the threshold level (the amount of 55.28 percent), in second regime, its impact is positive, due to occurrence of the phenomenon external crowded and some negative external consequences. Accordingly, it can be said that the hypothesis of U-shaped impact of the urbanization on public sector expenditure has been confirmed in the Iran.