The Optimal Size of Government in Point of View Achieving Maximum Economic Welfare in Iran

Government size and its effects on an economy is one of the important issues in economic researches. Recently، many attempts have been made to determine the optimal size of government and its effects on economic growth in most countries، spatially in the developing countries. Since، economic growth is just one of the dimensions of development، it is not sufficient the investigation of economic growth index in order to determine the optimal size of government. So the index of economic well-being (IEWB) is needed to express the state of social welfare. In this paper، consistent to Osberg and Sharp (1998)، the index of economic well being (CIEWB1) will be calculated for period of 1978-2007. Then we investigate the relationship between the size of government and economic well- being based on Armey nonlinear model in order to determine the optimal size of government. Moreover، the paper، analyzes the long- term relationship between them by using an auto-regressive distributed lag model (ARDL) as well as long- term Dynamics by vector auto-regressive process. The Estimation results reveal a nonlinear relationship between government size and economic welfare for Iran. The results imply that the optimal size of government is 20. 8% and 5. 9% based on the ratio of consumption and investment expenditure، respectively. Also، there is no a long- term relationship between government size (based on two indexes) and index of economic well-being. Moreover، the results show that the effects of fluctuations of government size on economic welfare are not permanent.