Does Direct Democracy Reduce the Size of Government? New Evidence from Historical Data, 1890-2000

Abstract

Using a unique historical dataset of all Swiss cantons from 1890 to 2000, we estimate the causal effect of direct democracy on government spending. Our analysis is novel in two ways: fi…rst, we use fi…xed effects to control for unobserved heterogeneity across cantons; second, we combine a new instrument with fi…xed effects to address the potential endogeneity of institutional reform. We …find that direct democracy has a constraining, but modest effect on canton spending. Our instrumental variable estimates suggest that a mandatory budget referendum reduces canton expenditures by 9 percent. A decline in the signature requirement for the voter initiative by one percent reduces canton spending by 2.2 percent. In contrast, we …find no evidence that direct democracy at the canton level results in higher local spending or a more decentralized government.

Keywords: Direct Democracy, Decentralization, Fiscal Policy, Referendum, Initiative, Switzerland

JEL Classification: H11, N43