The relationship between government size and economic growth has been widely debated. Departing from this
issue, we provide an empirical analysis of the impact of government size on technical efficiency. The aim of this
paper is to estimate by using a True Random Effect model the impact of public sector’s size and of public
expenditure components on 15 European countries’ technical efficiency from 1996 to 2011. Using the total public
expenditure as a proxy for the government size we estimate simultaneously national optimal production function
and technical efficiency model by controlling for income distribution and institutional quality. Our main findings
show that the effect of public sector’s size on efficiency is positive while the type of public expenditures may have
both positive and negative impact. In more details, results suggest that social protection, cultural, and health
expenditures have a positive effect on technical efficiency, while others have a negative impact. More
controversial is the impact of education expenditure, even if a positive effect on efficiency prevails when
controlling for heteroscedasticity