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The indirect effects of direct democracy: Local government size and non-budgetary voter initiatives

  • Asatryan, Zareh

Recently a wide and empirically-backed consensus has emerged arguing that direct democratic control over government's spending decisions through initiatives and referenda constrains government size. But what happens if budgetary matters are excluded from the voters' right of the initiative? I study this question by extending the analysis to German direct democracy reforms of the mid-1990s, which granted voters wide opportunities to initiate referenda on local issues, but neither the right, nor the responsibility of voting on the implied costs of these initiatives. By exploiting a novel dataset containing detailed information on close to 2,300 voter initiatives in the population of around 13,000 German municipalities from 2002 to 2009, I show that in this sample and in contrast to the Swiss and US evidence direct democracy causes an expansion of local government size by up to 8% in annual per capita expenditure and revenue per observed initiative (on economic projects). The main empirical challenge is the endogeneity of voters' unobserved preferences which simultaneously determine both their propensity towards exploiting their direct democracy rights and their preferences for local public policies. To address this issue I use state- and municipality-varying legislative thresholds on the minimum number of signatures required to initiate referenda and the time to collect these signatures as strong and exogenous instruments for observed initiatives.

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 14-004.

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Date of creation: 2014
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Handle: RePEc:zbw:zewdip:14004
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  1. Angrist, Joshua D, 1990. "Lifetime Earnings and the Vietnam Era Draft Lottery: Evidence from Social Security Administrative Records," American Economic Review, American Economic Association, vol. 80(3), pages 313-36, June.
  2. Jeffrey Zax, 1989. "Initiatives and government expenditures," Public Choice, Springer, vol. 63(3), pages 267-277, December.
  3. 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.
  4. repec:cto:journl:v:20:y:2000:i:2:p:255-277 is not listed on IDEAS
  5. Asatryan, Zareh & Baskaran, Thushyanthan & Grigoriadis, Theocharis & Heinemann, Friedrich, 2013. "Direct democracy and local public finances under cooperative federalism," ZEW Discussion Papers 13-038, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  6. Imbens, G. & Van Der Klaauw, W., 1993. "Evaluating the Cost of Conscription in the Netherlands," Working Papers 93-24, C.V. Starr Center for Applied Economics, New York University.
  7. Feld, Lars P & Kirchgassner, Gebhard, 2001. " Does Direct Democracy Reduce Public Debt? Evidence from Swiss Municipalities," Public Choice, Springer, vol. 109(3-4), pages 347-70, December.
  8. Romer, Thomas & Rosenthal, Howard, 1979. "Bureaucrats versus Voters: On the Political Economy of Resource Allocation by Direct Democracy," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 563-87, November.
  9. Joshua D. Angrist & Alan B. Krueger, 2001. "Instrumental Variables and the Search for Identification: From Supply and Demand to Natural Experiments," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 69-85, Fall.
  10. Frey, Bruno S & Kucher, Marcel & Stutzer, Alois, 2001. " Outcome, Process and Power in Direct Democracy: New Econometric Results," Public Choice, Springer, vol. 107(3-4), pages 271-93, June.
  11. Asatryan, Zareh & Baskaran, Thushyanthan & Heinemann, Friedrich, 2014. "The effect of direct democracy on the level and structure of local taxes," ZEW Discussion Papers 14-003, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  12. John G. Matsusaka, 2009. "Direct Democracy and Public Employees," American Economic Review, American Economic Association, vol. 99(5), pages 2227-46, December.
  13. Angrist, Joshua D, 1990. "Lifetime Earnings and the Vietnam Era Draft Lottery: Evidence from Social Security Administrative Records: Errata," American Economic Review, American Economic Association, vol. 80(5), pages 1284-86, December.
  14. Dale Bails and Margie A. Tieslau, 2000. "The Impact of Fiscal Constitutions on State and Local Expenditures," Cato Journal, Cato Journal, Cato Institute, vol. 20(2), Fall.
  15. Blomberg, S. Brock & Hess, Gregory D. & Weerapana, Akila, 2004. "The impact of voter initiatives on economic activity," European Journal of Political Economy, Elsevier, vol. 20(1), pages 207-226, March.
  16. Lars P. Feld & Gebhard Kirchgassner, 1999. "Public Debt and Budgetary Procedures: Top Down or Bottom Up? Some Evidence from Swiss Municipalities," NBER Chapters, in: Fiscal Institutions and Fiscal Performance, pages 151-180 National Bureau of Economic Research, Inc.
  17. Robert Salvino & Michael T. Tasto & Geoffrey K. Turnbull, 2012. "A direct test of direct democracy: New England town meetings," Applied Economics, Taylor & Francis Journals, vol. 44(18), pages 2393-2402, June.
  18. Kiewiet, D Roderick & Szakaly, Kristin, 1996. "Constitutional Limitations on Borrowing: An Analysis of State Bonded Indebtedness," Journal of Law, Economics and Organization, Oxford University Press, vol. 12(1), pages 62-97, April.
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