The empirical analysis of the effect of income inequality on the public expenditures of the provinces using the Middle Voter Model

 Income inequality and the role of redistribution policies are major issues in economics and politics. In the literature on the economic public sector, income distribution is introduced as one of the effective factors in changing the government spending. According to the median voter model, the government bases the supply of public goods and services on the demand of the median voter to meet the demands of the majority of citizens. In this regard, the median voter theorem states an optimal solution for the determination of the public goods level based on what the median individual prefers in a democratic system along with the majority voting rule (Atkinson and Stiglitz, 1980). According to the median voter theory, the government expenditure is affected by median voter preferences, and certain economic policies are selected to maximize the median voter utility; whereby the optimum level of public goods is determined (Dadgar, 2013). In the framework of median voter model, Hindriks and Myles (2006) suggest that a decrease in the median voter income to the society income average means an increase of inequality in the society and a raise in the demand for public goods and services. Accordingly, government expenditures are increased to satisfy the utility of most people; as a result, the government size grows. This proposes the hypothesis of the effect of inequality on the government expenditures. It is an important issue for some reasons. First, the government expenditure plays a major role in the implementation of fiscal policies which seek income equality in terms of distribution and stability. Thus, the income inequality influences the fiscal policy performance through the government expenditures. Second, the government paya attention to citizens’ demands due to political factors, which brings desirable consequences such as upgraded local managers and the continuity of current state activities (Zhang, 2020). Concerning the importance of such a discussion, this paper seeks to examine the effect of income inequality on the government expenditures in Iran’s provinces and to answer the question whether increasing income inequality is a source of government growth at a local level.        In order to empirically test the effect of income distribution on public spending in Iran’s provinces, an econometrics model based on panel data is considered as follows: In this equation, the public expenditures of a province per capita (  ) (including the current and construction expenditures in terms of million Rials) and the corresponding Gini coefficient, which represents the inequality of income distribution, are dependent and explanatory variables, respectively. The other explanatory variables are the province’s gross domestic production per capita ( ) (at current prices in terms of million rials), the province’s tax revenues per capita (in terms of million Rials) ( ), and the share of the province’s income from oil revenues (per capita in terms of million Rials) ( ), which is considered as the intergovernmental grant (from the central government to the provincial government). Also, indicates the disturbance of the model, and i and t are the sections (32 provinces) and time (during the period of 2006-2018), respectively. This model uses the Generalized Method of Moment (GMM). The results of dynamic panel estimation using the Generalized moments method (GMM) show that an increase in the income inequality leads to a raise  in the government expenditures in the provinces of the country. Also, lagged provincial expenditures, provincial GDP and intergovernmental grants (from the central to provincial governments) have positive and significant effects on public expenditures at the provincial level. The research’s findings are in line with the political model of government growth that emphasizes the positive relationship between income inequality and government expenditures. According to it, a raise of inequality increases the citizen’s demand for public goods and eliminates inequalities. In these conditions, the government is inclined to increase its expenditures that are effective in the improvement of its political position and attraction of citizen’s satisfaction. Increase of income inequality causes poverty and class gap in the society, which shows the inefficiency of government distribution policies. There are various reasons for the increase of the government expenditures and the public sector growth suggested by Hindriks and Myles (2006) in the context of a political model. The model shows that the distribution of income predisposes the government growth. From the point of view of public policies, inequality forces the government to spend on public goods and services to meet the people demand. This finding is in line with the political theory of government growth that emphasizes an increased inequality leads to bigger government; individuals that face inequality and poverty have more demand for public goods. Thus, the increasing of the government expenditures is supported by so many people; the government increases its spending in order to satisfy most people. This justifies the increase of public expenditures with the aim of satisfying the public preferences.