How to Tame Two Leviathans? - Revisiting the Effect of Direct Democracy on Local Public Expenditure

Abstract

We explore how the vertical structure of direct democracy in a federal context affects expenditure decisions of sub-central governments. In so doing we revisit previous research on the effect of direct democratic institution on public policies. Particularly, the effect of upper-level (state) existence of direct democratic control on local expenditure. Empirically we exploit the fact that both states (cantons) and local governments (municipalities) enjoy a high autonomy in setting their degree of direct democracy. This allows us to take into account vertical differences between institutions, i.e. we can distinguish the effect of state direct democracy on local expenditures for municipalities with and without own direct democratic instruments. Considering 119 municipalities belonging to 22 Swiss cantons for the period 1993-2007 we highlight that municipalities without fiscal referenda belonging to cantons with fiscal referenda present higher expenditure, while the effect is much reduced and statistically significantly different for municipalities that also avail of referenda.

Keywords: direct democracy, local public expenditure, vertical interaction

JEL Classification: H720, H770, D720, D780