Direct Democracy and Debt

Abstract:     
The constitutions of numerous states require municipalities to obtain electoral approval prior to issuing debt. When the electorate rejects debt proposals, however, officials may proceed with the proposed project through an alternative financing mechanism that does not require a vote. There are two sets of competing explanations for this phenomenon. The first, benign, explanations suggest either that the alternative forms of financing do not implicate the concerns that underlie debt election requirements, or that those who vote in bond elections do not represent residents' preferences. Thus, circumvention of bond election results by local officials does not contravene the interests of the community. If that is the case, then bond election requirements may be superfluous or harmful. The second, more malign, explanations suggest that local officials who pursue rejected projects seek to avoid constraints on agenda-setting authority, or to serve limited interests that do not reflect the general welfare of the municipality. If that is the case, then election requirements may reduce agency costs and should arguably be extended to alternative financing mechanisms that are currently excluded. While it is difficult to determine which of these effects dominates, I speculate that the Ultimatum Game structure of bond elections may generate a result that approximates an optimal level of debt for municipalities.

Number of Pages in PDF File: 54

Keywords: referendum, debt, debt election

JEL Classification: H3, H7, K0

Accepted Paper Series