More is better with good institutions: evidence from European public social spending
European welfare states are characterized by a different amount of resources devoted to social policies,
despite an ongoing convergence of national policies. The Public Choice literature and some empirical analysis on the
efficiency of the public sector point out that higher levels of government spending are often related to greater
inefficiencies. Can this relationship be considered general? What does it emerge from the empirical analysis of social
spending in European countries? We use two indicators to assess the relative effectiveness and efficiency of European
welfare policies: the first one is a composite indicator representing the performance of the national social policies and
summarizing the outputs achieved in all sectors of social protection (family, health, labour market, elderly, disabled,
unemployment, and inequality). The second indicator is an efficiency index calculated as the ratio of net social per
capita expenditure to the performance index. The analysis shows that the variability of the efficiency across welfare
systems cannot be explained only by the amount of resources devoted to social policies. Contrary to previous evidence,
we document that higher efficiency characterizes countries with higher social expenditure levels. As a further step of
the analysis, we investigate the role of the institutional environment on the efficiency of social spending. We show that,
in addition to socio-economic variables (GDP and education), institutional variables - such as accountability and
honesty of public officials - have highly significant effects on the efficiency of the policies.