The Impact of Immigration on the Size of Government: Empirical Evidence from Danish Municipalities

Several studies have reported a negative relationship between ethnic heterogeneity and the size of the public sector. One problem with this literature is that ethnic composition is hardly exogenous, which obstructs attempts to reveal causal mechanisms. This paper explores the impact of changes in ethnic heterogeneity in Danish municipalities from 1995 through 2001, a period marked by an unprecedented influx of refugees. A state-sponsored placement policy restricted their choice of residence and required local governments to accept them as citizens. The analysis of the impact of this influx has not revealed any support for the claim of a decline in public sector size.