Examining the impact of revenue diversity on government productivity using stochastic frontier production function: the U.S. State government

Abstract

ABSTRACT This study empirically examines the impact of revenue diversity on government productivity across U.S. states via a two-step system generalized method of moments (GMM) estimation during a 41-year period (1980–2020). Government productivity is driven by revenue diversity, economic growth, fiscal health, and population density. In particular, increasing revenue diversity promotes state governments’ productivity, supporting our hypothesis. This result holds even after the mortgage crisis. These new findings suggest that states can enhance their productivity by expanding their revenue sources. Economic growth and rising fiscal health foster government productivity; these results apply after the mortgage crisis as well. An increase in population density also boosts government productivity during the study period. Climbing tax burdens undermine productivity, whereas growth in long-term debt facilitates productivity after the mortgage crisis. This study defines and expands the concept of productivity in U.S. state governments and explores influencing factors. Subsequent research can build on this theoretical model by integrating other variables tied to government productivity.