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Introduction: One of the goals of governments in today’s world is to increase social welfare. So, governments are seeking to achieve their goals through interventions in the economy, including increasing government expenditures, but they may not succeed in achieving such a goal. The size of government or the ratio of government spending to gross domestic product is one of the indicators of government intervention in the economy, which the size of government has been one of the major issues in many economic researches. In this regard, the purpose of this article is to investigate how the extent of government activities or government size affect social welfare in Iran’s economy during the period of 1975- 2012.
Method: In this research, by modeling the factors affecting social welfare, with emphasis on the effect of government size, a threshold regression model has been estimated for Iran’s economy. The threshold model is a model in which a predetermined predicted behavior by the model changes from a threshold value. In this paper, the size of the government is the threshold variable, which is determined by estimating the threshold of the size of government which divides the size of government into two large and small size government regimes. Then, the extent of the size of government in two large and small government regimes is estimated on social welfare and the optimum government size regarding to maximize social welfare has been estimated.
Findings: The threshold of the government size has estimated about 29%. Hansen’s test shows that the estimated threshold is significant and the model has a threshold value of government size. Therefore, the threshold model has two large and small government regimes that distinguishes the two regimes with a threshold of 29%, meaning that when the government size is less than 29%, we are in a small government size regime, and when the size of the government is larger than 29% is in the regime of large government size. The variable of government size in two large and small government regimes has had a different effect on the social welfare index. In a small government size regime, the size of government did not have a significant impact on the social welfare index, but after increasing the size of the state and overtaking the 29% threshold and being in the regime of large government size has had a significant negative impact on the social welfare index. Therefore, government size has a non-linear and threshold effect on the social welfare index. Also, the first lag of social welfare in both of the small and large government size regim has had a significant positive impact on social welfare. In addition, in the small government size regime, the increase in the degree of openness of the economy has not had a significant impact on social welfare, but with the expansion of government size and staying in the large government size regim, the degree of openness has had a significant positive impact on social welfare. Finally, the unemployment rate in the small government size regime has not had a significant impact on social welfare, while in the large government size regime, the effects of unemployment on social welfare were negative and significance.
Discussion: The meaninglessness of the effect of government size on social welfare in the small government size regime is due to the neutralization of the positive and negative effects of government expenditures on social welfare, which in this regime, as the government has not yet intervened much in the economy, has positive effects, such as the supply of public goods and government recruitment and the negative effects of spending, such as the ineffectiveness of government expenditures and renegotiation of each other, and that the impact of government size on social welfare has been meaningless, but in a large-government regime, the negative effects of government size are overcome on its positive effects and the government size has negative effect on social welfare. In the large government size regime, for reasons such as crowding out effect, large-scale rendering due to the presence of a large government, inefficiency of government development expenditures, and the reduction of labor productivity in the public sector due to unnecessary employment in the public sector, all contribute to undermining economic growth and thus reduce social welfare. Moreover, the high level of government’s presence through increased spending and, as a result, an increase in total surplus demand on the one hand, and the creation of a deficit and its provision through borrowing from the central bank, creates inflation, which causes inflation to worsen the distribution of income and so social welfare will be decreased in this way too. Based on the results of the research, it is suggested that in order to increase social welfare, the size of the government should be smaller. in this regard, the correct implementation of the general policies of article 44 of the constitution is recommended in the assignment of ownership, along with management to the real private sector.

Keywords: Government Size, Iran’s Economy, Social Welfare, Threshold Regression

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