Direct democracy and government size: evidence from Spain

Abstract

I study the effects of direct democracy on economic policy in a novel setting. In Spain, national law determines that municipalities follow either direct or representative democracy, depending on their population size. Using a fixed-effect regression discontinuity design, I find that direct democracy leads to a smaller government, reducing public spending by around 8 percent. Revenues decrease by a similar amount and, therefore, there is no effect on budget deficits. These findings can be explained by a model in which direct democracy allows voters to enforce lower special-interest spending. I provide several additional results and discuss alternative mechanisms.

Taxation Under Direct Democracy

“…Again, however, we do not observe any significant effect of town meetings on national elections. We therefore do not find compelling evidence that direct democracy comes at the cost of representative decision making, corroborating findings by Sanz (2020) for Spain.…”

A Costly Commitment: Populism, Economic Performance, and the Quality of Bureaucracy

“…Conversely, the autonomy of the executive leader is arguably weaker in forms of government where the executive leader ultimately responds to the will of the local council. This is the case, for instance, for Spanish (Sanz 2020), Finnish, Swedish (Pettersson‐Lidbom 2012), and French municipalities (Tricaud 2021), which—despite the marked decentralization in the management of public services—do not directly elect the head of the executive.…”

Backing the Incumbent in Difficult Times: The Electoral Impact of Wildfires

“…In Spain, transfers from upper-level governments account for almost 50% of a municipality’s revenues. They include transfers to finance current and capital (infrastructure) expenditures—see Sanz (2019) for a description of public finances in Spanish municipalities. If, after a fire, upper-level governments decide to increase transfers to the affected municipality, this could benefit the local economy and trigger a voter gratitude response.…”