DO INFORMATION TECHNOLOGY INVESTMENTS LEAD TO BIGGER OR SMALLER GOVERNMENTS? – THEORY AND EVIDENCE IN U.S. STATE GOVERNMENTS

Government growth has been a long-standing research issue among public economists as well as an important concern of the general public. This paper investigates the impact of government IT investments on government growth. Drawing on the literature on public economics, political sciences, and IT value, I offer theoretical discussions and four mechanisms as to the relationship between IT investments and government expenditures, leading to two competing hypotheses that IT investments either expand or shrink the amount of government expenditures. Using data on IT investments, state government finances, demography, and other institutional and socioeconomical factors, I test which prediction prevails in the context of U.S. state governments. The empirical investigations support the hypothesis that greater IT investments are associated with smaller state government size, measured as a ratio of annual total expenditures to state gross domestic product.