Direct Democracy and Local Public Finances under Cooperative Federalism

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Non-technical SummaryA growing literature studies the role of political institutions in shaping fiscal outcomes.One of the most important differences in political institutions of established democracies is whether fiscal and economic decisions are made by elected representatives or through direct voting. Popular influence over policy making brings fiscal policy closer to the electorate's preferences. If representatives prefer more spending than voters, then direct democracy will constrain public budgets. If voters prefer more spending than representatives, then spending will be higher in political jurisdictions that allow for more direct democracy.The public choice tradition argues that elected politicians tend to overspend, overtax and to overborrow due to the interests and influence of bureaucrats or special interest groups. Direct democracy may shift power to voters themselves thus alleviating the principle-agent problems. Direct legislation is one mechanism of the fiscal constitution that allows voters to constrain the Leviathan government.In a federal setting, however, local voters may face particular common-pool disincentives. If the funding of municipalities originates from a "common pool" of country-wide and future taxpayers, voters also welcome overspending on local public goods and services. Voter disincentives may even be larger than those of local politicians. The latter are often constrained by the policies of their countrywide parties. This may result in voters' inaction against constraining the Leviathan or even incentivize them to act as a Leviathan themselves against the taxpayers of other jurisdictions. In this case, direct democracy increases spending.The present paper tries to answer empirically which of the two perspectives has validity for Germany. It is the first analysis of the link between direct democracy and fiscal outcomes for Germany, an archetypal cooperative federation. Hence, Germany offers an intriguing case of comparison against the existing Swiss and US evidence.The starting point of the empirical analysis exploits the variance in the use of voter initiatives at the municipal level in the German State of Bavaria. We have information on all initiatives since the introduction of the right of petitioning for referenda in 1995.Using an selection on observables approach, we find a negative instantaneous correlation between referenda activity and municipal budgets. This turns positive with increasing lags.To address the obvious endog...

To what extent do fiscal spending rules affect budget composition?

“…15 Standard errors are clustered at the provincial level in order to have a sufficient number of municipal units to avoid unreliable standard errors, as it would with clusters at the municipal level (Angrist and Pischke, 2008). TO [4][5][6] show that consumption decreased by 33.40 euro (column 6), which represents about 3% of the total budget. In addition, the current spending item affected is the one related to services.…”

“…However, from 2006 onwards, whilst consumption remained stable, investment constantly decreased, falling to 1.62% in 2010. 4 2 Law no. 367/2000.…”

“…This approach relaxes the linearity assumption of the previous method and uses polynomial functions of order 2 to draw the relationship between budget values and the population level. The estimated model is: (4) where the variables and the DiDisc estimator are defi ned as in the LLR method. Columns 3 and 4 of table 4 show that the DSP effects are in line with the previous fi ndings.…”

Overlapping political budget cycles

“…ultimately remain an assumption, we believe that the literature provides us with ample evidence that that is the case for German local elections (more so than for Swiss or US voters). Most importantly, Asatryan et al (2017) show that the introduction of direct democracy at the local level in Germany is associated with more public spending and document that local German voters do not seem to be fiscally conservative. Freier (2015) shows that mayors -comprising those of towns included in our sample -achieve a significant increase in the incumbency advantage when raising spending over and above the median level increase.…”

Regression Discontinuity Designs Based on Population Thresholds: Pitfalls and Solutions

“…), gender quotas (see Campa ; Casas‐Arce and Saiz ), electoral rules (see Barone and De Blasio ; Eggers ; Fujiwara ; Gulino ; Hopkins ; Pellicer and Wegner ), direct democracy (see Arnold and Freier ; Asatryan et al. ; Asatryan, Baskaran, and Heinemann ), fiscal transfers (see Baskaran ; Brollo et al. ; Litschig and Morrison , ), and (like Pettersson‐Lidbom , ) council size (see Egger and Koethenbuerger ; Koethenbuerger ).…”