EXPLAINING THE SIZE OF THE PUBLIC-SECTOR

This paper aims at providing an explanation for the size of the public sector based on the idea of ''social insurance''. The main assumption made is that the public sector is less efficient but also less volati le than the private sector. The ''demand-driven'' level of the public sector that is derived as the one that maximizes the utility of the re presentative employed consumer depends positively on the variance of p rivate output. An increase in the size of the public sector has a posi tive effect on expected employment and a negative effect on expected c onsumption. The size of the public sector set by the government which maximizes the probability of being re-elected will be higher than the ''demand-driven'' level if voters' preferences for employment is highe r than the consumption loss associated with public employment.