A MACROECONOMIC MODEL ON THE QUALITY OF GOVERNMENT AND ECONOMIC PERFORMANCE

We determine the relative rewards to producers, private rent‐seekers, and bureaucrats and allocation of talent between them in a general equilibrium model. Unproductive activity creates a negative externality on the relative rewards to producers. If the size of bureaucracy is exogenously given, among the multiple equilibria, the one with fewer private rent‐seekers yields higher welfare. By choosing a small size of bureaucracy, the government can establish the superior equilibrium as the unique outcome, which also achieves the constrained optimum. If the population of bureaucrats is endogenously determined, however, a larger bureaucracy enhances production and welfare. The size of government and economic performance are jointly determined, and their relationship depends on the quality of government. Our result supports the view that the size of government may not matter much; what is important is the quality of government. (JEL E60, E61, H00)