Paper #1123

Title:

Does direct democracy reduce the size of government? New evidence from historical data, 1890-2000

Authors:

Patricia Funk and Christina Gathmann

Date:

December 2007 (Revised: October 2008)

Abstract:

Using historical data for all Swiss cantons from 1890 to 2000, we estimate the causal effect of direct democracy on government spending. The main innovation in this paper is that we use fixed effects to control for unobserved heterogeneity and instrumental variables to address the potential endogeneity of institutions. We find that the budget referendum and lower costs to launch a voter initiative are effective tools in reducing canton level spending. However, we find no evidence that the budget referendum results in more decentralized government or a larger local government. Our instrumental variable estimates suggest that a mandatory budget referendum reduces the size of canton spending between 13 and 19 percent. A 1 percent lower signature requirement for the initiative reduces canton spending by up to 2 percent.

Keywords:

Direct Democracy, Fiscal Policy, Switzerland

JEL codes:

H11, N43

Area of Research:

Labour, Public, Development and Health Economics

Published in:

Economic Journal, Royal Economic Society, vol. 121(557), pages 1252-1280, December 2011.

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