Political competition, Conditional convergence, Cointegration, Public expenditure, Size of government, Politics versus economics, D7, H1, H3, H5,

Further sampling properties of previously derived (Zellner 1975) MELO estimates for reciprocals and ratios of parameters and for structural coefficients of econometric models are presented. Approximate small-sample moments and risk functions of MEW estimators for these problems are derived and compared with those of other well-known estimators. The exact finite sample distribution of the MEW reciprocal mean estimator is derived and compared with that of the maximum likelihood estimator. Properties of alternative structural coefficient estimators are compared with those of the MEW estimator both theoretically and in terms of two applications.KEY WORDS: Bayes estimators; Ratio estimation; Simultaneous equations estimation j Maximum likelihood estimators.well-known structural econometric models, Klein's Model I and the Girshick-Haavelmo food model. FINITE SAMPLE PROPERTIES OF MELO ESTIMATORS FOR RECIPROCALSWe assume that the observations Yi, i = 1, 2, ... , n, are independently drawn from a normal population with mean /.I (/.I~0) and variance u 2 • Our problem is to estimate 8 = 1//.1. As is well-known, the ML estimator for 8, @ Journal of the American Statistical Association March 1979, Volume 74, Number 365 Theory and Methods Section where E,. == posterior expectation operator and jl and varu are the posterior mean and variance of /.I, respectively. If u 2 = u o 2 , a known value, and a diffuse prior pdf for /.I is employed in the normal mean problem, then jl = fi, var/.l = u o 2 /n, and from (2.2), (2.2) (2.1) (2.3) e(1 + 2 2 ) , {j = 1/'ii , A 1 1 8 = ------fj 1 + uN(nfj2) where fi = L~=l Yi/n, does not possess finite moments and has infinite risk relative to quadratic and many other loss functions. As pointed out in Zellner (1978), a MELO estimate of 8 relative to L.(O, 0) = [(0 -0)/OJ2 (1 -/.10)2 is A 1 ( 1 ) O-E E 2 _ _ -,./.I/,.fJ. -_ 1 + / 2 ' /.I var/.l il where e 2 = uo 2/n and 2 = fi/e has a N(/.I/e, 1) sampling pdf. Thus, the MELO estimator in (2.3) is equal to the ML estimator, 1/fi, multiplied by a "shrinking factor" 2 2 / (1 + 2 2 ) . Note that 2 = n1fi/u o is a sampling theory test statistic for testing /.I = 0; and also the reciprocal of the coefficient of variation of the posterior pdf for /.I. As pointed out in Zellner (1978), 101~te and thus 0 possesses finite moments of all orders and finite risk relative to L.(8, 0) and many other loss functions. Also, when 121 < 1, the posterior pdf for 8 shows pronouncedbimodality and special treatment of this problem within the MELO estimation framework is required-see the Appendix of Zellner (1978).

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We address the problem of how to investigate whether economics, or politics, or both, matter in the explanation of public policy. We first pose the problem in a particular context by uncovering a political business cycle (using Canadian data for 130 years) and by taking up the challenge to make this fact meaningful by finding a transmission mechanism through actual public choices. Since the cycle is in real growth and it is reasonable to suppose that public expenditure would be involved, we then focus on investigation of the role of (partisan and opportunistic) political factors, as opposed to economics, in the evolution of government size. We ask whether the data allow us to distinguish between the convergence and the nonconvergence hypotheses. Convergence means that political competition forces public spending to converge in the long run to a level dictated by endowments, tastes and technology. Nonconvergence is taken to mean that political factors other than the degree of political competition prevent convergence to that long run. The general idea here is that a political factor can clearly be said to play a role in the evolution of public choices if it can be shown to lead to departures from a dynamic path defined by economic fundamentals in a competitive political system.The results of applying cointegration and error correction modeling to implement this idea indicate that public expenditure cannot serve as the required transmission mechanism. Of the political factors considered, only variation in the degree of political competition leads to substantial departures of public expenditure from its long run path defined by economic fundamentals. We conclude with some general implications of the analysis for future research.