Comparing Time Series Cross-Section Model Specifications: The Case of Welfare State Development

In recent years, an impressive number of pooled time series (TSCS) cross-section models have been estimated in order to test hypotheses on welfare state development. Although most of these models share several of the variables, they can often be distinguished by the model specification adopted. This begs the question: what is the appropriate specification for modeling welfare state development? In order to answer this question some leading specifications are evaluated with respect to their ability to meet the theoretical assumptions about the theory of welfare state evolution in addition to the econometric canons on panel analysis. The main conclusions of this paper are the following. First, all specifications in levels are econometrically unfounded because most of the variables typically used for analyzing this topic cannot be considered to be stationary. Second, although a first difference model performs better from an econometric point of view, it is unable to test the hypothesized long-term relationships underlying welfare state dynamics. Third, and more importantly, the single equation error correction model represents the best pooled TSCS specification for modeling welfare state development since it is able tocapture long-run effects even in the presence of nonstationary processes.