Open AccessDoes Direct Democracy Reduce the Size of Government? New Evidence from Historical Data, 1890–2000 *
Author(s) -
Funk Patricia,
Gathmann Christina
Publication year - 2011
Publication title -
the economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.683
H-Index - 160
eISSN - 1468-0297
pISSN - 0013-0133
DOI - 10.1111/j.1468-0297.2011.02451.x
Subject(s) - endogeneity , referendum , instrumental variable , direct democracy , democracy , decentralization , economics , government (linguistics) , government spending , public economics , control (management) , control variable , econometrics , political science , politics , statistics , welfare , linguistics , philosophy , law , market economy , mathematics , management
Using new historical data from Swiss cantons, we estimate the effect of direct democracy on government spending. We use fixed effects to control for unobserved heterogeneity and new instruments to address potential endogeneity concerns. We find that direct democracy constrains canton spending but its effect is more modest than previously suggested. The instrumental variable estimates show that a mandatory budget referendum reduces canton expenditures by 12%. Lowering signature requirements for the voter initiative by 1% reduces canton spending by 0.6%. We find little evidence that direct democracy at the canton level results in higher local spending or decentralisation.