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AbstractGovernment spending is a policy instrument used to sustain economic development and improve social welfare. Empirical observations, however, reveal a significant decrease in the government spending to GDP ratio for the United States. In addition, the United States has been observed to exhibit a rise in firm heterogeneity in productivity in recent decades. This paper shows that the optimal size of government expenditure will decrease as firm heterogeneity increases. We thus indicate that the rise in firm heterogeneity in productivity may serve as a plausible vehicle to explain the decline in the share of government spending in GDP for the United States.

AbstractRecent empirical observations indicate that firm size responds to cyclical fluctuations in economic activities. By analyzing the effects of endogenous overhead costs in the economy, this paper finds that in response to a fiscal expansion, firm size will increase if the relationship between overhead costs and the number of firms is positive, while firm size will decrease if the relationship is negative.

AbstractI consider productive government spending and preference for diversity in an imperfectly competitive macroeconomic framework, and analyze how differences in industrial structure affect economic growth and the welfare level. Two main findings emerge from the analysis. First, the optimal ratio of government spending is related to the extent of public expenditure externalities and preference for diversity. Second, the vertical separation regime leads to a higher economic growth rate and welfare level than the vertical integration regime, provided that the degree of monopoly power is relatively small.