We investigate the possibility that diversity in income, religion, and
ethnicity affects the size of a country's public sector. Public provi
sion of goods may be inefficient in the presence of diverse preference
s about public sector spending, and voters may be unwilling to finance
transfer payments to people whom they perceive as different from them
selves. We find that ethnic diversity discourages transfer payments by
central governments, and that income diversity discourages other publ
ic expenditure.