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

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  • Patricia Funk
  • Christina Gathmann

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.
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Suggested Citation

  • Patricia Funk & Christina Gathmann, 2011. "Does Direct Democracy Reduce the Size of Government? New Evidence from Historical Data, 1890–2000," Economic Journal, Royal Economic Society, vol. 121(557), pages 1252-1280, December.
    • Handle: RePEc:ecj:econjl:v:121:y:2011:i:557:p:1252-1280
    DOI: j.1468-0297.2011.02451.x
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    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • N43 - Economic History - - Government, War, Law, International Relations, and Regulation - - - Europe: Pre-1913

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