The Political Economy of Direct Legislation:Is There a Role of Direct Democracy in EU Decision-Making?

by

Lars P. Feld and Gebhard Kirchgässner

University of St. Gallen

Swiss Institute of International Economics

and Applied Economic Research (SIAW-HSG)

and CESifo

Abstract

Based on the recent intentions of reforming the governance structure in the EU and proposalsby scholars to introduce instruments of direct democracy to EU decision-making procedures,we discuss the main theoretical arguments why and how referenda and initiatives have an im-pact on economic policy outcomes. We test the theoretical hypothesis on the impact of directdemocracy empirically on the basis of an econometric model of fiscal behaviour using data forthe Swiss cantons and local communities. It is shown that referenda on fiscal matters at bothlevels have a dampening effect on expenditure and revenue, and at the local level also onpublic debt. The results are put into perspective by discussing them in the context of alreadyexisting empirical results. Finally, we evaluate the arguments as to why instruments of directdemocracy may have a beneficial impact on EU policy outcomes and enumerate conditions forthe success of referenda and initiatives in EU decision-making.

Keywords: Public Spending and Revenue, Budget Deficits, Referenda, Direct Democracy.

JEL Classification: H63, H61, H72, D78.

Revised Version, March 2001. − The authors would like to thank Richard Baldwin, MichaelLechner, Christoph Schaltegger, Jean-Robert Tyran and two anonymous referees for helpfulsuggestions and discussions.

Mailing Address: Prof. Dr. Gebhard KirchgässnerUniversity of St. GallenSIAW-HSG, InstitutsgebäudeDufourstr. 48CH-9000 St. GallenSwitzerlande-mail: Gebhard.Kirchgaessner@unisg.ch

1 Introduction

In the last decades, direct democracy has gained considerable momentum. In Switzerland,which is often considered as the cradle of direct democracy, the number of referenda and ini-tiatives held at the federal level steadily increased from 21 in total in the 1930s to 90 in totalin the 1990s.1 Moreover, the number of initiatives and referenda at the Swiss state (cantonal)and local levels is even higher than the federal ones. In the U.S., initiatives and referenda areincreasingly popular. In 1993, the state of Mississippi introduced the popular initiative in itsconstitution, while the introduction of the initiative is also considered in New Jersey, RhodeIsland and Texas. This constitutional development is accompanied by an increasing use of di-rect legislation in the U.S. states. In California, the U.S. state in which initiatives are most fre-quently used, 49 initiatives were already held from 1990 to 1996 while only nine initiativeswere held in the sixties.2 At the German state and local levels, the hurdles to use direct legis-lation, in the form of signature requirements and quorums, have been significantly reducedsince 1989.3

Meanwhile, the introduction of elements of direct democracy at national levels is discussed.Franz Müntefering (2000), the general secretary of the German Social Democrats, suggestedto introduce referenda and initiatives at the German federal level. His partisan colleague, theEU Commissioner for External Affairs, Günter Verheugen, proposed to put Eastern En-largement on the ballots in an EU wide referendum. The Danish referenda on the participationof Denmark in EU integration are widely debated and respected in the other EU memberstates. In quite a number of Eastern European countries, new constitutions include the right forinitiatives and referenda.4 Finally, even The Economist stated: “... the next big change inhuman affairs will probably not be a matter of economics, or electronics, or military science; itwill be a change in the supposedly humdrum world of politics. The coming century could see,at last, the full flowering of the idea of democracy. ... If democracy means rule by the people,democracy by referendum is a great deal closer to the original idea than the every-few-yearsvoting which is all that most countries have.”5

In the coming years, a reform of the governance structure is one of the major challenges theEU faces. Decision-making procedures at the EU level have to be successfully adapted to anenlarged and deepened union. The necessary reforms of governance in the EU are supposed toaccomplish two different goals. On the one hand, they have to be efficient such that decision-making costs are kept low even if enlargement towards Eastern Europe includes the larger partof potential entry candidates. Enlargement should not lead to prohibitively slow decision-

1. See Statistisches Jahrbuch der Schweiz 2000, Table 17.13, NZZ, Zürich, p. 454.

2. See Heussner (1999, p. 107).

3. See the contributions in Heussner and Jung (1999).

4. See White and Hill (1996).

5. Cited from: ‘Full Democracy: It means government by the people and we are the people’, in: A Survey ofDemocracy: Happy 21

st Century Voters, Supplement to The Economist 341 (7997), December 21, 1996,

p.1.

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making. On the other hand, many current member states do not want to lose their veto powerwith respect to crucial political issues. A possibility to achieve the latter goal in politicalquestions that particularly concern voters is the introduction of EU-wide referenda. Raisingthe veto power of citizens in such a fashion would allow to increase the efficiency in the rep-resentative part of EU decision-making by reducing the veto power of single member states inthe representative bodies of the EU.

Several scholars who have studied the EU propose the general introduction of elements of di-rect democracy in EU decision-making. In his evaluation of the different policy proposals,Hug (2000, chap. 6) distinguishes required referenda and non-required referenda on govern-ment or on opposition proposals and discusses the potential impact of referenda and initiativescompared to the current decision-making process. In most cases, scholars suggest to introduceelements of direct democracy without specifying in which instances a referendum should takeplace or qualifying under which circumstances an initiative should be allowed for. In cases aspecification is made, required referenda are proposed for ‘constitutional changes’ meaningchanges of the treaties. A referendum decision on Eastern enlargement would fall under thiscategory. In the cases, the majority requirement for required referenda is specified, scholarspropose a ‘double’ majority of voters and of states, in both cases simple majorities. Non-re-quired referenda are proposed to be triggered either by voters or by the European Parliament.Hug criticises that the proposals are not discussed in comparing them with the existing deci-sion-making procedures in order to find out to what extent the introduction of referenda andinitiatives actually changes policy outcomes in the EU.

In Feld, Kirchgässner and Weck-Hannemann (2001), it is suggested to consider the introduc-tion of ‘budget referenda’ in EU decision-making without qualifying very much what a budgetreferendum means, i.e. without clarifying the institutional provisions shaping the budget refer-endum. In this paper, our aim is to go a step further towards realism. We propose that EU de-cisions that have important financial implications are to be decided by EU citizens in an EU-wide referendum. This referendum should be binding and is a required referendum. We pro-pose a ‘double’ majority of voters and member countries for the adoption of policies or treatychanges with important financial consequences. Both majorities should be simple majoritiesin addition to the current decision-making requirement in the different EU decision-makingprocedures. We thus only take the first step to introduce veto power of citizens via a budgetreferendum without discussing to what extent the representative part of governance in the EUcould be optimised in exchange.

The proposed budget referendum does not affect current budgetary decisions in the EU verymuch. The reason for this is that it is supposed to be a referendum on the rules shaping thebudgetary process which allows EU citizens to decide additionally on important changes ofEU statutes or elements of the treaty if they have strong financial implications. For instance,EU enlargement will involve considerable changes in EU agricultural and structural funds andmight even require an additional spending instrument. According to our proposal, EU en-largement would fall under the budget referendum if the financial implications exceed a cer-tain spending threshold. The financial perspectives undertaken by the EU every five years as

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the general guidelines for budget allocations are another example of a decision that wouldhave to be decided by voters in a referendum according to our proposal. The financial per-spective of the EU fixes the upper spending limit of the EU budget in percent of GDP, thepercentage rate of VAT revenue the EU obtains from the harmonised VAT base of the mem-ber countries and contains additional or potentially important budgetary decisions. Althoughthe annual budget could not be decided by voters without imposing prohibitive decision-making costs on the EU, there is no such reason as to why the rules shaping the annual budgetshould not be decided by citizens in a referendum.

Our proposal is made on the basis of theoretical and empirical results on the impact of fiscalreferenda on budgetary outcomes. We outline the main theoretical arguments why referendaand initiatives usefully supplement representative democracy. The central theoretical argu-ment is that citizens get instruments to selectively control representatives whenever they devi-ate too much from their own preferences in specific political questions. Taking up earlier re-sults for Switzerland, we then study the impact of fiscal referenda and statutory initiatives onpublic revenue, public spending, budget deficits an public debt on the cantonal and local lev-els in Switzerland. We first consider the impact of mandatory fiscal referenda and initiativeson cantonal revenue, spending, deficit and debt for a panel of 26 Swiss cantons from 1986 to1997. Second, we investigate the impact of referenda on new bonds and of budgetary proce-dures on local government spending, revenue and deficits using a cross section of 134 large(including the largest) Swiss cities.

The paper is organised as follows: In Section 2, we survey the main theoretical arguments whyand how referenda and initiatives have an impact on economic policy outcomes and presentthe main empirically testable theoretical hypotheses derived from that analysis. In Section 3,we briefly introduce the reader to institutions of direct democracy in Switzerland. In Section 4,we offer an econometric model for the empirical analysis of the impact of direct democracy onpublic spending, revenue and deficits, present the empirical results and put the results intoperspective by discussing them in the context of existing empirical results. Finally, we discussour policy proposal in the light of the theoretical and empirical results and offer some con-cluding remarks (Section 5).

2 The Political Economy of Direct Legislation from a Theoretical Perspective

To be able to evaluate proposals of an introduction of referenda and initiatives in EU decision-making, it is useful to understand how these instruments work and which normative issues areassociated with democratic reforms. The constitutional choice between more or less directforms of democratic government entails a trade-off between information costs and costs dueto loss of control of political decisions for the people. Representative democracy is supposedto have an informational advantage compared to direct legislation. Citizens delegate decision-making power to representatives in the public sector in order to save information costs. How-ever, representatives then have leeway to act opportunistically or in the self-interest of narrowgroups. We analyse this trade-off first by considering the information transmission in direct

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and representative democracies. Next we investigate the restrictions of referenda and initia-tives to representatives in a game theoretic context assuming symmetric information of allplayers. Finally, we discuss how the introduction of asymmetric information changes the out-comes of referendum and initiatives by taking into account the impact of interest groups.

2.1 The Trade Off between Informed Decision-Making and Government Control

Politics can be thought of as a result of specialisation of people having different abilities. Ac-cording to Osborne and Slivinski (1996) as well as Besley and Coate (1997) some citizenshave comparative, some even absolute advantages in doing politics. Citizens decide whetherthey want to engage as professional politicians or not. In the elections, the candidate who getsthe highest vote share wins and imposes his/her preferred policies after the election. Citizenshave incentives to vote for candidates only on the basis of their preferences and policy-makingabilities. The resulting discretionary power of policy-makers provides incentives for candi-dates to endogenously acquire competence on political issues and to specialise in specificfields. Political decisions in purely representative democracies are thus hypothesised to be ta-ken on the basis of higher information. Like people allow their investment consultants discre-tion in the decision which shares to sell and to purchase, they delegate decision-making powerto political specialists in order to decide political issues.

Following a normative approach, the simple majority of voters should nevertheless be able toenforce its preferences in such a political process. Political competition between different par-ties or candidates may serve as a means to insure this normative goal. For political competi-tion to work, voters have to be well informed about politics in order to evaluate the perform-ance of incumbents (or parties) during their years in office correctly. Given the high costs andlow benefits which accompany the gathering of political information, voters cannot be ex-pected to have sufficient knowledge of political issues. Such an incomplete information re-duces the power with which competition helps to enforce citizens’ preferences in politics. AsKessler (2001) shows, this asymmetric information between representatives and citizens en-tails a loss of control of the former by the latter and more generally leads to deviations of pol-icy outcomes from citizens’ preferred policy choices. Referenda and initiatives serve as meansto selectively control representatives between election years. Citizens can use a (binding) ref-erendum to reject government statutes or constitutional amendments. They can be mandatoryor optional. An optional referendum takes place if a certain number of citizens asks for it.Referenda are used to control the policy that is actually undertaken by the government. In con-trast, citizens use initiatives to propose new policies that have been neglected by the politicalestablishment, perhaps because they are not in their interest. Thus, representative democracyhas an information advantage over direct democracy, but referenda and initiatives allow tocontrol representatives more strongly.

The stronger control of representatives by citizens in a referendum democracy may inducepolicymakers to make less effort to acquire information than in parliamentary democracies be-cause they have to give up discretion to the principal. This argument, which has been put for-

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ward by Aghion and Tirole (1997) in a general model of organisations and by Kessler (2001)in the context of direct democracy, only holds, however, if parliaments are not involved in thefinal political decision, as is the case in the Californian initiative process. On the contrary, rep-resentatives in the Swiss parliament have an incentive to stay informed because they, first,have the possibility of suggesting a counterproposal to a popular initiative, and, second, due toroll call votes, citizens observe how the representatives from their constituency have voted.

Moreover, in reality, the information advantage of representative democracy is reduced. Rep-resentatives in parliaments are often badly informed about political issues they do not regardas their expertise. Division of labour is continued in the parliaments: decisions are predeter-mined in committees by a small number of specialised and informed legislators. Since less de-cision-makers are involved there, each decision-maker obtains a higher chance of being influ-ential and thus has incentives to acquire information. Moreover, the supply of information tofewer people is also less costly. Both mechanisms work in the same direction leading to betterinformed specialists than the ordinary representatives. Nearly exclusively, the latter in theparliament follow the positions of their specialists in the committees, if they are present at all.An open discussion rarely takes place. In most cases, an obligation to vote in accordance withparty policy prevails: In a whipping system, deviations from party positions lead to sanctionsthat can include the end of a political career. Focusing on citizens instead of representatives,similar forces work but in the opposite direction. In a representative democracy, citizens areless influential than in a direct democracy. Thus, demand and supply of information lead tobetter informed citizens in a direct than in a representative democracy. Consequently, repre-sentative democracies may have more informed policy-makers, but direct democracies havebetter informed citizens.

In purely representative systems, the question emerges whether these well-informed special-ists have sufficient incentives to consider the (general) interests of citizens, or whether they at-tempt to follow their own (partial) interests or that of their constituency. They often representthe interests of particular groups on whose behalf they occupy a seat in parliament. Thus, theyhave incentives and frequently also possibilities to deviate systematically from the interests ofthe population, in order to capture rents for themselves and their constituencies. These con-siderations raise at least some doubts as to whether the ‘more informed’ political decisions inrepresentative democracies made by specialists are ‘better’ than political decisions in directlegislation, in which proposals of specialists have to get an approval by voters.

2.2 Referendum and Initiative in a Direct Democracy

How do referenda and initiatives actually restrict representatives in their political decisions? Itcannot be expected that the preferences of a majority of citizens are automatically imposed bya referendum or an initiative. Both institutions shape a political game in which several actorsplay a role. If the government is allowed to propose a policy change, it sets the agenda whichquestion has to be decided in the political process and which alternatives are excluded. As anagenda setter it may succeed in proposing a policy that is closer to the preferences of the

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majority of citizens6 than the status quo. Then, the citizens will accept such a proposal al-though it is not at the ideal position of the majority. In contrast to referenda, initiatives shiftagenda setting power to citizens.

To show how different institutional arrangements affect budgetary outcomes, we adapt themodel by Romer and Rosenthal (1979).7 Assume that public expenditures are solely financedby taxes. A drafted increase of expenditures thus induces higher taxes as well. To keep themodel as simple as possible the policy space is assumed to be uni-dimensional althoughbudgetary decisions in most cases involve more than one dimension. All political actors areassumed to have Euclidean preferences with respect to the level of expenditures E. The mostpreferred point by a political actor is called his ideal point. The farther away actual expendi-ture levels are from this point, the lower is the utility a person derives from a spending policy.All political actors are assumed to be fully informed on the preferences of others and thestructure of the game, and to prefer their decisions not to be revised by others.

Budgetary Policy Making with a Fiscal Referendum

GE

Figure 1

Figure 1 illustrates a situation where government wants to spend taxpayers’ money for an ad-ditional spending project.8 The current spending level is denoted by q. It is the status quo towhich the government and the citizens have to refer to if no agreement on new spending isreached. This point is also called the reversion point. The median voter’s ideal point of gov-ernment spending for the new project and thus his/her optimal spending level is depicted by

point VE . In a pure median voter world, a government would propose a spending level that is

equal to the one preferred by the median voter. In this case, a referendum would be totally ob-solete. Such an outcome would be probable in a pure direct democracy in which each spend-ing decision must be made by the citizens, e.g. in a town meeting of all citizens. If we assume

6. The majority of voters is conceptualised in political economy models by the concept of the median voter.The median voter is the decisive voter in simple majority decisions who turns a minority to a majority at themargin. If voters are ordered according to their preferences from low to high levels of a policy, the medianvoter has as many citizens preferring less of a policy below its own position as citizens preferring more of apolicy above it. In order to facilitate the discussion, we refer to the preferences of the median voter wheneverwe mean that a policy or spending proposal would gain a simple majority of voters at the ballots.

7. The following assumptions are standard in spatial voting models, see, e.g., Romer and Rosenthal (1979),Steunenberg (1992), as well as Feld and Matsusaka (2000).

8. The following representation of the Romer and Rosenthal (1979) model mainly draws on Feld and Ma-tsusaka (2000) Section III.

VE qEV −2 CqEV +−2q

Low spending High spendingMx 0x Gx

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that the government has a preferred spending level of GE which is higher than the spending

level preferred by the median voter, an overspending problem results. GE should be inter-

preted as the government’s preference for the new spending project taking into account thepossibility of losing re-election and other political costs.

With no referendum or initiative, the government chooses a spending level that is equal to itsideal spending point and realises this spending policy subsequently. Consider now that thenew spending project has to be approved by citizens in a referendum if it ought to becomepolicy. In this case, voters will reject any spending proposal that yields less utility than thestatus quo spending level would offer. The maximum spending proposal that citizens will ap-prove is derived by the point located just as far away to the right from the citizens’ preferredspending level as the status quo is to the left, which is Mx . At this point, citizens are indiffer-

ent between accepting the government’s spending proposal, which entails higher spendingthan they prefer, or not realising the new spending project. Because the government knowsthat spending levels higher than xM are not approved by the citizens, it proposes xM. Thus, themandatory referendum matters if xM is lower than the spending level preferred by the gov-ernment: Government spending is restricted to a lower level if voters have a stronger prefer-ence for low spending than the government. Since governments anticipate that in their policyproposal, the restriction to government already occurs in advance.

In this simple case, we refer to a mandatory spending referendum. It is also important to un-derstand how an optional referendum works. The optional referendum only takes place, if acertain number of citizens forces the government to hold a referendum on new spending proj-ects. If the voters pay cost in terms of collecting signatures, they are allowed to vote on thegovernment’s spending proposal. The cost of collecting signatures is denoted by C. Underthese circumstances, the government must make the voters indifferent between its spendingproposal and the utility voters can derive from the realisation of the status quo minus thesecosts of collecting signatures. The maximum spending proposal at which this is achieved is x0

which is above xM. Thus, if the government wants to spend more money on this project thanthe majority of voters both, the mandatory as well as the optional referendum, can force thegovernment in the direction of the preferences of the citizens, but the mandatory is stricterthan the optional referendum. Similar conclusions can be drawn with respect to an under-spending problem. In any case, spending outcomes are not farther away from the preferencesof the citizens, at least of the median citizen, in a referendum democracy than without it, butthey may be quite closer to them.

Finally, let us consider a polity in which an initiative is available.9 If voters pay the cost ofcollecting signatures to make a proposal, they can achieve their optimal spending level xV withan initiative. Collecting signatures for an initiative entails cost of K to the voters. They areonly willing to bear these cost, if the government’s proposal is farther away from their idealpoint and thus induces a utility loss at least as high as signature collection costs. Therefore, the

9. See again Feld and Matsusaka (2000) Section III.

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government can at most propose Ix . Otherwise, an initiative will be introduced by citizens.

Besides the pure existence of the right to introduce an initiative, the signature requirement thatleads to cost K is important. The higher the signature collection cost, the higher – ceteris pari-bus – the spending level proposed by the government can be, i.e. the less binding the initiativebecomes. If the maximum spending level proposed in an initiative is lower than the spendinglevel preferred by the government, then the initiative will restrict government spending to becloser to the citizens preferences than in a pure parliamentary democracy. There is also arelationship between the mandatory fiscal referendum outlined above and the initiative. If themaximum spending level proposed in an initiative is lower than the maximum spending whichwould still be accepted by the citizens in a mandatory referendum, then the initiative isbinding while the latter has no effect.

Budgetary Policy Making with an Initiative

Figure 2

Instead of using a referendum or an initiative to restrict policy-makers in their spending dis-cretion, voters can impose legal restrictions on the government either at the constitutional orstatutory level. Compared to referenda and initiatives formal fiscal requirements have the ad-vantage that voters do not have to interfere each time when a new spending project is ripe fordecision. Rational voters can just forecast the spending requirements of a polity in the futureand set the fiscal restraints respectively. It would save them information and transaction costs.The distinction between constitutional and statutory requirements is in the imposed restric-tions to change these rules. It is easier to change statutory than constitutional fiscal restraintsbecause the latter usually require a larger majority for changes. The disadvantage of formal re-straints is to be found in the inflexibility of the instrument. It may thus be more favourable forcitizens to control governments’ spending behaviour selectively by referenda or initiatives in-stead of using formal requirements, but it can also be advantageous to employ both instru-ments.

2.3 Imperfect Information and the Role of Interest Groups

Thus, referenda and initiatives can induce a correction of political outcomes in favour of thepreferences of the median voter, even in the case of strategic manipulation or agenda setting.On the other hand, possibilities of vote trading10 and the impact of interest groups on policy

10. Breton (1996) argues that direct legislation prevents gains from vote trading. On the other side, Weingast,Shepsle and Johnson (1981) emphasise the losses that are due to vote trading and pork-barrel politics.

VEGE

q

Low spending High spendingIx Gx

KEV +ˆ

Vx

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outcomes might induce additional deviations from the median voter’s optimal outcome and sorender the theoretical concept of the median voter model useless. This might prove to be par-ticularly the case if information is asymmetrically distributed between citizens and represen-tatives: Representatives can use their information advantage strategically.

Asymmetric information has an impact on the functioning of the mandatory referendum.Marino and Matsusaka (2000) develop a model of several budget procedures used in privateand public decision-making along the lines of the theory by Aghion and Tirole (1997).11 Theyconstruct a situation similar to the one discussed above, in which the representative has a biastowards higher spending. In addition, the authors assume that representatives are better in-formed than citizens. They study two different decision-making procedures, one with fulldelegation in which representatives have full discretion about spending decisions, and anotherone with partial delegation such that voters can veto or override a spending proposal ex postby a referendum or an initiative. They show that in the partial delegation case representativeshave an incentive to supply biased information to citizens in order to obtain their approval forhigher spending levels. Moreover, the authors show that these information biases can be se-vere such that full delegation dominates partial delegation at least for routine projects. Theoptimal decision-making rule is one in which there is full delegation below a spending thresh-old such that larger projects have to be decided by the voters. This holds since it turns out tobe more difficult to distort information in large projects than in small projects.

There is also an asymmetric information case in the initiative process if representatives areimperfectly informed about the citizens’ preferences. Matsusaka (1992) argues that under suchcircumstances even benevolent politicians may impose policies that are deviating from citi-zens’ preferences. Instead, they choose to propose a referendum on certain issues in order toavoid being punished at the polls for enacting the wrong policy. As Matsusaka and McCarty(1998) show, interest groups may be able to fool representatives using the threat of an initia-tive by pretending that their position is closer to citizens’ preferences than the proposal ofrepresentatives, although this moves the policy outcome further away from the ideal point ofthe median voter. Thus, imperfect and asymmetric information may provide opportunities forinterest groups to unduly influence political outcomes in direct democracies.

The question then becomes whether special interests have a stronger influence on policy out-comes in referenda and initiatives than they have in purely parliamentary democracies. On thewhole and in a comparative perspective, the impact of interest groups is not at all clear. Thesegroups influence policies in both representative and direct democracies. On the one hand, theirimpact is more visible in direct legislation than in representative democracies because theirpositions are discussed openly in referendum campaigns. On the other hand, interest groupsinfluence drafted bills in the public administration and by convincing (or bribing) legislatorsalready at early stages of the legislative process. Finally, since referendum campaigns arecostly, particularly well-organised and wealthy interest groups have the ability to successfullyrun referendum campaigns.

11. See Kessler (2001) for such a summary of the Marino and Matsusaka model.

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Primarily, the latter argument is widely debated among political scientists. The bottom line ofthe evidence in the U.S. can be summarised by referring to Gerber (1999) who studies the im-pact of interest groups on the basis of campaign contributions to 161 ballot measures between1988 and 1992 in eight U.S. states. She finds that economic interest groups as opposed to citi-zen groups use direct legislation less often to pass new laws by initiatives and more often topreserve the status quo or to pressure legislature. Economic groups have more success inblocking measures through opposition spending, but are not able to pass new initiatives,whereas citizen groups are more successful in doing so.12 Less systematic, but similar evi-dence is reported by Longchamp (1991) for Switzerland.

Interest groups clearly influence outcomes in representative democracies, but it is equally un-disputed that interest groups have an impact on policy outcomes in direct democracies. It ishowever fully open whether their impact is stronger or less intense in direct than in represen-tative democracies. Given this uncertainty, it is worth noting that we do have evidence, for theU.S. and Switzerland, that political outcomes are closer to citizens’ preferences under directdemocracy than they are under representative democracy. For example, using aggregate dataon Swiss cities in 1970, Pommerehne (1978) shows that the median voter model performsbetter in jurisdictions in which political decisions are taken by voters directly in referenda andinitiatives. Gerber (1996, 1999) presents evidence for the U.S. strongly supportingPommerehne’s result. For two political issues, parental consent laws and capital punishment,she shows that initiatives correct policy outcomes towards the preferences of the medianvoter. Gerber (1996a) also provides evidence that the deviation of policy outcomes from citi-zens’ preferences can be traced back to the influence of interest groups on representatives.

2.4 Some Testable Hypotheses

These theoretical considerations do not provide a conclusive assessment as to whether institu-tions of direct democracy have a positive or negative impact on policy outcomes. But the the-ory allows us to derive empirically testable hypotheses to be tested in the next sections. It alsoserves to highlight the key issues that, from our point of view, might help separating benefi-cial from less favourable features of referenda and initiatives as a necessary prerequisite forthe evaluation as to how an introduction of elements of direct democracy in EU decision-making should be institutionally designed.

The simplest question that should be posed at the outset of an empirical investigation of directdemocracy is whether these institutions have an impact on policy outcomes at all. Are refer-enda and initiatives simply veils for rational decisions of individuals? Or do they shape (eco-nomic) policy outcomes and successfully serve as restrictions on individual behaviour? Thus,we get the following hypothesis:

12. Gerber’s evidence, as each evidence on the impact of campaign spending, has a particular shortcoming: Itmay be distorted due to an endogeneity bias. On the one hand, higher spending is supposed to increase theprobability of success at the ballots. On the other hand, a higher expected success leads to lower campaignspending of interest groups.

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Hypothesis 1: (Economic) policy outcomes in pure representative (parliamentary, presiden-tial) democracies do not significantly differ from those in democracies withreferenda and initiatives.

From Hypothesis 1, the direction of the impact of referenda and initiatives on public policy isstill not clear. We particularly focus on fiscal policy in the theory and the empirical sectionbecause fiscal policy covers an important part of public policy and in many instances regula-tory policy indirectly affects spending. Formulated like in Section 2.2, public spending, as ourpolicy example, would be lower because of the restrictions imposed on policymakers by refer-enda and initiatives. This result depends on the assumption that citizens prefer less spendingthan representatives and the bureaucracy. If voters are more fiscally conservative than repre-sentatives, as Peltzman (1992) shows for the U.S., then spending should actually be lower in adirect democracy compared to a representative democracy. More generally, referenda and ini-tiatives should correct policy outcomes to the preferences of citizens, at least to that of themedian voter. Hypothesis 1a follows straightforward:

Hypothesis 1a: Referendum and initiative outcomes entail lower spending (and revenue) lev-els than budgetary decisions derived only in the parliamentary process.

In the remaining (empirical) part of this paper we present some evidence on these two hy-potheses. The evidence together with the theory are used to derive some tentative conclusionswhich features a referendum at the EU level should have.

3 Direct Democracy in Switzerland

Direct democracy does nearly not exist in its pure form of an assembly meeting. The only ex-ceptions are town meetings in the U.S. and Switzerland. Today, elements of direct democracy,like referenda and initiatives, are introduced in addition to elements of representative democ-racy. Referenda and initiatives are increasingly used in OECD countries. Butler and Ranney(1994) provide an extensive account of the different systems. When it comes to testing of theimpact of referenda on policy outcomes empirically, international comparisons are howeverdifficult to accomplish. Like in any cross-country study, it is impossible to keep the manyfactors that influence public policies constant. Comparing different institutional structures iseven more demanding since two referenda in different countries follow seldom the same con-stitutional features. Conducting empirical studies with state-level data from one country thushas specific advantages because the necessity to achieve comparability of institutions is lesssevere. Only in the U.S. and Switzerland, a sufficient variation of institutions of direct democ-racy at the sub-federal level exists to allow comparative empirical studies. Both countries canserve as laboratories to gain insights for a polity like the EU in which the member states areand for a long time will be the most important political units.

Before it comes to actual empirical testing with Swiss data, a brief introduction to the Swissinstitutional structure is necessary. Like the U.S., Canada, Australia, Germany and Austria,Switzerland has a federalist structure. Since 1978, it consists of 26 cantons and half-cantons

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after the canton of Jura successfully and more or less peacefully seceded from the canton ofBerne.13 Like the two American federal states and much more strongly than Australia, Austriaand Germany, the Swiss lower level governments have significant fiscal autonomy, i.e. theyhave considerable power to tax,14 to raise other revenue, to spend public funds and to issuepublic bonds. Cantonal expenditures in total exceeds federal or local spending. Cantons con-centrate their spending on infrastructural services.

Nearly all 26 cantons have a representative democracy in the form of a parliament. There arehowever 2 to 5 exceptions. These cantons use(d) a type of a ‘town meeting’ form of govern-ment for the whole canton called ‘Landsgemeinde’. In the end of the nineties, three of theformer five cantons abolished the ‘town meeting’ as an institution and switched over to a rep-resentative democracy with referendum and initiative.15 All cantons allow at least for one typeof direct voter control. Even cantons with no citizen influence on legislative issues have aconstitutional referendum on partial or total revision of their constitution. Whether cantonalconstitutions allow for the institutions of mandatory or optional statutory referendum, consti-tutional or statutory initiative does not follow from a general rule, but varies from canton tocanton. In addition, specific fiscal and administrative referenda exist.16 We focus on fiscal ref-erenda on new spending projects, tax law changes or new bonds, and also have a look atstatutory initiatives.

Figure 3 provides a geographical summary of the fiscal referendum in 1996. The white shadedcantons are those which have a mandatory and an optional fiscal referendum, the light greycantons are those with a mandatory fiscal referendum only, while heavy grey ones only havean optional fiscal referendum. The canton of Vaud (black) does not have any fiscal referen-dum. Thus, 17 cantons have a mandatory fiscal referendum and 20 cantons an optional fiscalreferendum in 1996. What is called a fiscal referendum here is a fiscal referendum on newspending projects. There are also fiscal referenda on tax changes and on new bonds. We con-centrate on the first type only. In the case of a mandatory fiscal referendum, a new spendingproject is already decided in the representative part of democratic decision-making, either bygovernment and parliament or by the elected officials in the ‘town-meeting’ cantons. If the fi-nancial size of the project exceeds a certain threshold, a referendum on the project must beheld. Voters can then either approve or reject the project at this given size. Representativeshave a chance to revise the proposal and propose the draft to the voters in another referendum.

13. ‘Half-cantons’ refers to the fact that three cantons split up which were already members of the federation.Two half-cantons have the same influence on federal decision making, e.g. in the second chamber of parlia-ment or in mandatory referenda on constitutional amendments, as one canton has. The six half-cantons areObwalden and Nidwalden, Appenzell a. Rh. and Appenzell i. Rh., Basel-Stadt and Basel-Landschaft. We donot mention half-cantons subsequently, but refer to them as normal cantons.

14. For a comparison of state and local taxation in OECD countries see Feld and Schneider (2001).

15. The two cantons still having ‘town meetings’ for the whole canton are Glarus and Appenzell i.Rh.. The can-tons of Nidwalden (1997), Appenzell a.Rh. (1998) and Obwalden (1999) abolished this institution.

16. For a comprehensive description of the political structures of the different cantons see Trechsel and Serdült(1999). Referenda and initiatives are also widely used at the Swiss local level. See Feld and Kirchgässner(1999) for a description of the data used in Section 4.3.

– 13 –

The optional referendum is similar. The difference is that voters can force representatives tohold a referendum on a new spending proposal if they succeed to collect a predeterminednumber of signatures from their fellow citizens.

Provisions for Budget Referenda in Swiss Cantons, 1996Source: Feld and Matsusaka (2000)

Figure 3

What is important to note here is that the spending threshold is usually larger for the manda-tory than for the optional referendum. In the majority of cantons, the spending threshold is de-noted in absolute nominal terms. In 1996, it ranged for the mandatory referendum from250’000 SFr in Schwyz to 25 million SFr in Luzern.17 The incentive it provides to represen-tatives is clear: If the project costs less than the threshold amount, a referendum can be cir-cumvented. The referendum actually restricts representatives depending on their ability to di-vide projects.

17. See Trechsel and Serdült (1999), p. 38.

BEFR

NE

SO

JU

GE

VD

VS

UR

LU

OW NW

SZ

ZG

BL

BS

SH

GL

ZHAG AR

AI

SG

GR

TG

TI

– 14 –

The voter initiative differs from the referendum mainly by the agenda setting power. By theinitiative (groups of) voters propose a new law which is put to a vote if they are able to collecta predetermined number of signatures. The higher the number of signatures, the more difficultand costly it is to successfully run an initiative. In the case of public spending, the initiativeallows to cut spending programmes which are below the spending threshold. The initiative isavailable in all cantons. Signature requirements range from 1 in the town meeting cantons to15’000 in the canton of Bern in 1996. In both cases, the referendum and the initiative have noquorum, i.e. no additional requirement with respect to the share of citizens or of the popula-tion, exists. Both are adopted by a simple majority of people who actually vote.

Fiscal restraints usually occur together with provisions for fiscal referenda. While nearly allcantons have constitutional fiscal restraints that demand them to balance their budgets overtime in one way or the other, only five cantons, Fribourg (FR), Solothurn (SO), Appenzell a.Rh. (AR), St. Gallen (SG) and Graubünden (GR), have statutory fiscal requirements.18 Theyforce them to increase their tax rates if budget deficits increase above a deficit threshold. InFribourg this requirement is specified such that local taxes are not covered by it and a bail-outof the cantonal by the local level is less probable. In St. Gallen and Solothurn, there is an addi-tional restriction on decreases of the tax rates additionally binding them in order to restrict de-ficit financing. The requirements are less restrictive in Appenzell a.Rh. and much less inGraubünden.

4 An Econometric Model of the Fiscal Impact of Direct Democracy

In order to test the hypotheses empirically, we focus on fiscal policy issues of the Swiss can-tons and local jurisdictions. Fiscal policy is certainly only one of the important political issues,and for some people it might not be the most important one. However, on the one hand it is –without doubt – important in itself, and on the other hand it is easy to measure: It is mucheasier to get reliable empirical evidence about the differences between the political outcomesof (semi-)direct versus purely representative political systems with respect to fiscal policy thanwith respect to other political issues. And if there are significant differences with respect tofiscal policy, we can be quite sure that there exist similar differences with respect to otherpolicy areas as well.

4.1 The Basic Model

We first develop the basic econometric model which we employ for analysing fiscal policy.19

In order to look at fiscal policy as comprehensively as possible, wedo not only consider publicexpenditure (per capita), but also public revenue, the budget deficit as well as public debt. Indoing so, public spending and public revenue are computed in net terms. In particular in the

18. For a detailed description of these restraints see Stauffer (2001, pp. 72).

19. The model we use is quite common in the study of fiscal policy, it corresponds, e.g., to the deficit and debtmodels of Roubini and Sachs (1989) and de Haan and Sturm (1994) and the spending and revenue models ofMatsusaka (1995).

– 15 –

cantonal case, matching grants per capita, with a mean of about 1406 Swiss francs comparedto a mean of lump sum grants per capita of SFr 456, are highly unequally distributed amongthe cantons. Matching grants per capita range from SFr 5673 in the canton of Uri in 1989 toSFr 306 in the canton of Basel-Landschaft in 1991, while the range of lump-sum grants isfrom SFr 244 in Thurgau in 1990 to SFr 1189 in Zug in 1987. We thus exclude federally in-duced public spending.

We distinguish three different types of explanatory variables: The first group includes eco-nomic and structural variables as they are usually employed in models which explain fiscalbehaviour. The most important of these variables is, of course, income. Generally, over timehigher income is supposed to lead to higher spending and revenue. Higher spending resultsbecause of increased demand of citizens for public services if their income increases. Higherrevenue results because revenue of the Swiss cantons and local jurisdictions is mainly derivedfrom progressive or proportional income taxes. However, this does not necessarily imply thatin the cross section domain the same relation holds. It might be the case, e.g., that withinSwitzerland in ‘rich’ local communities more services (like, e.g., schools) are provided pri-vately, which might result in less per capita public revenue and spending compared to localcommunities with less income per capita. To take account of this possibility, in the cantonalmodel we measure income by two variables: One variable is national GDP per capita which is(necessarily) the same for all cantons and describes the common economic development inSwitzerland, while the other variable is the difference between cantonal and national GDPwhich is supposed to capture canton-specific developments.

Whether lower or higher deficits and debt occur due to higher GDP cannot be assumed a pri-ori. On the one hand, higher income may be accompanied by a lower level of public deficitsand debt for liquidity reasons. On the other hand, sub-federal jurisdictions with higher in-comes may have to contribute larger amounts to fiscal equalisation systems and thus have anincentive to increase their public deficits and debt levels in order to reduce these contribu-tions. In this case, higher income might be associated with higher deficits and debt levels.

In addition, the unemployment rate is included in the model to proxy business cycle develop-ments. Higher unemployment is supposed to trigger higher spending, lower revenue, higherbudget deficits and higher public debt. In order to control for the impact of intergovernmentalgrants between jurisdictions, the model also contains federal lump sum grants per capita. Asnoted above, we use net spending and revenue in order to exclude the distorting impact ofmatching grants on cantonal spending. Lump-sum grants enable cantons instead to allocate thefunds according to their own priorities. A higher level of lump-sum grants should lead tohigher spending as well. In the literature on the flypaper effect, it is much discussed whetherthe availability of lump-sum grants increases public spending by more than the amount ofthese grants.20 Lump-sum grants may also be used to reduce spending from own public fundssuch that the increase of spending due to the grants is less than 100 percent. In addition, a high

20. For a survey on fiscal illusion containing a discussion of the flypaper effect see Dollery and Worthington(1996).

– 16 –

amount of grants is related to a higher extent of bail-out by other jurisdictions. This might leadto lower incentives to use the resources economically. Therefore, it may – ceteris paribus –incur higher budget deficits and public debt.

Since the number of inhabitants can play a crucial role on the level of public expenditure, apopulation variable has to be included in the equation as well. However, the expected sign ofthis variable is ambiguous. On the one hand, more inhabitants will pay for public goods. Thisreduces cost per capita, and it should lead to lower public expenditure. On the other hand, dueto economies of scale in their provision some public goods will only be provided in agglom-erations. In this case, the overall level of public expenditure for the agglomeration might in-crease and – ceteris paribus – budget deficits and public debt might also rise. In order to dis-entangle both effects, population density and the share of the urban population are additionallyincluded in the model. Moreover, we control for the demographic structure of a canton byusing the shares of the population older than 65 and younger than 20 years. Both variablesmay be interpreted as indicating the demand of these two particular population groups forpublic spending as well as their ability to generate public revenue.

We also include a regional variable reflecting the language differences among the Swiss can-tonal and local communities. This variable is the share of the French and Italian speakingpopulation. A quite common prejudice is that ‘Latin’ cantons and communities have higherpreferences for ‘public sector solutions’ of social problems and are thus inclined to have more‘unsound’ public finances, i.e. higher spending, higher revenue, higher deficits and higherdebt.

As a second group, the model contains some political variables. The first one follows the ar-guments of the partisan cycles models that left wing parties generate unsound public finances.The share of left wing parties in the parliament should have a positive impact on the level ofpublic spending, public revenue, budget deficits and public debt. The second political variablemeasures the strength of an executive government by introducing the number of coalitionparties in the executive. As outlined by Roubini and Sachs (1989), the more political partiesare involved in the executive, the larger budget deficits and public debt should be. This impactis derived from the argument that the more parties are involved in the government the moreconstituencies must be satisfied with specific public services which leads to higher spending.In addition, the less revenue is generated because the tax burden should not fall on theseparticular constituencies. This leads to higher debt in the long-run. However, because themembers of the Swiss cantonal and local governments are in nearly all cases directly elected,there is a broad representation in most Swiss sub-federal governments which is distinct from‘Roubini-and-Sachs-type’ coalitions. Therefore, it is open whether this variable should have asignificant impact in the Swiss case as well.

Finally, we include institutional variables which represent the political decision structure. Thefirst and most important is the dummy variable for fiscal referenda which is one if a cantonhas a mandatory fiscal referendum and zero otherwise. If this variable is significant, we areable to reject Hypothesis 1. Given the results by Peltzman (1992) that voters are fiscally more

– 17 –

conservative than representatives, we can expect that fiscal referenda restrict the spendingcapabilities of representatives which corresponds to Hypothesis 1a: It should lead to lowerspending, lower revenue, lower deficits and lower public debt. As a second variable, the num-ber of signatures (in percent of the population) required to hold a statutory initiative is in-cluded in the model in order to measure the restriction the initiative imposes on spending byrepresentatives. The higher this share is the higher is the cost of a referendum for citizens. Ahigher signature requirement is thus accompanied with less restrictions on public spending.The signature requirement should have a positive impact on public revenue and spending and,if citizens are also more ‘conservative’ than their representatives with respect to public defi-cits and debt, then also on these aggregates.

The final structural variable that is included in the model is an index of statutory fiscal re-straints. It ranges from zero in cantons with statutory fiscal restraint to three in the cantonswith the most stringent restraints. The more restrictive the statutory fiscal constraints are, thesounder public finances should be, i.e. the lower public spending, budget deficits and publicdebt should be. Since these requirements have a strong revenue bias forcing the cantons toavoid deficits by higher tax rates, the sign of this variable on public revenue is not determineda priori: It might lead to higher revenue. But if this is the case, the size of the coefficient in therevenue equation should be smaller than the one in the spending equation.

Thus, for our empirical analysis we end up with the following model:

(1) X = f (YN, ∆Y, U, Grants, Pop, Dens, Old, Young, Urban, French, Left, Coal, DD,Sign, Constr),

where the dependent variable X, stands for the following four fiscal variables,

• (net) public expenditure per capita;

• (net) public revenue per capita;

• budget deficits per capita;

• public debt per capita,

and the explanatory variables are:

• YN national GDP per capita;

• ∆Y difference between regional (cantonal) and national GDP per capita;

• U unemployment rate;

• Grants federal lump-sum grants per capita;

• Pop population;

• Dens population density;

• Old share of population older than 65;

• Young share of population younger than 20;

– 18 –

• Urban share of urban population;

• French share of the French or Italian speaking population

• LEFT share of leftist parties in the parliament;

• COAL number of parties in the executive;

• DD a dummy variable which takes on the value of one if there is a fiscal refer-endum on new spending and zero otherwise;

• Sign number of signatures required for a statutory initiative in percent of thepopulation;

• Constr statutory fiscal constraints which takes values between zero for the cantonswith no statutory fiscal requirement and three for those with the most strin-gent fiscal restraint.

In the next two subsections, this model is adapted to the Swiss cantons and the local jurisdic-tions, respectively, and the corresponding empirical results are presented. The data we use arepanel data for the 26 cantons with annual data from 1986 to 1997 and cross-section data for134 local communities for the year 1990.

4.2 Results for the Swiss Cantons

A first inspection of the data shows that there are two cantons which – compared to all othercantons – have exceptionally high public revenue and expenditure: the cantons of Basel-Cityand of Geneva, both being typical ‘city cantons’. Actually the distributions of revenue andexpenditure are bimodal, where the upper part consists only of the observations of these twocantons. If we exclude these observations, the null hypothesis of a normal distribution can notbe rejected on any conventional significance level for the logarithms of these variables.21 Totake account of these ‘outliers’ instead of dropping these observations we additionally intro-duced dummy variables ‘D-Basel-City’ and ‘D-Geneva’ for those cantons being one in thecase of the respective canton and zero otherwise. There is, however, another outlier in thedata, revenue of the canton Appenzell a.Rh. in 1996. In this year, cantonal revenue lies about50 percent above the ‘normal’ value, because this canton sold its ‘own’ cantonal bank to theUnion Bank of Switzerland (UBS) in this year which created large additional revenue. In or-der to take account of this special development, we subtracted the extraordinary revenue fromtotal revenue of that canton in this year.22

The existence of fiscal referenda might not only have a direct impact on public revenue andexpenditure, but also an indirect impact through other variables. To check this, we always per-formed a Chow-Test for a structural break between the two sub-samples with and withoutmandatory fiscal referenda. With the exception of the two debt equations, the null hypothesis

21. Employing a Jarque-Bera-Test, we get p-values of 0.160 for cantonal expenditure and of 0.286 for cantonalrevenue per capita.

22. We get nearly the same results if we use the original data and add an additional dummy variable just for thisone observation.

– 19 –

of no structural break could always be rejected on very high significance levels. Thus, we es-timate the equations not only over the total sample but also for the two sub-samples. However,especially the equations for the representative democracies have to be interpreted cautiously:We have only 95 observations which are from only 9 cantons. Especially with respect to thosevariables which have hardly any variation over time this is certainly not sufficient to drawstrong conclusions.

– Table 1 about here –

The results for the log-linear specification are given in Table 1.23 For comparability, the esti-mates for the whole and the two split up samples are reported together such that the second tofourth columns contain the estimation results for the spending equation of the whole and thetwo split up samples, the fifth to seventh columns the revenue equations and the eighth totenth columns the results for the debt equations.

Overall, the models for the total period as well as for the two sub-samples can explain thevariance of cantonal public spending and revenue quite well, whereas the variance of cantonalpublic debt can hardly be explained by this model. However, as was to be expected from theresults of the Chow-Test, the coefficients in the models for the two sub-samples are quite dif-ferent from each other, while – due to the larger number of observations – the coefficients inthe common model are mostly quite similar to those in the equations for the direct democra-cies, i.e. those which have a mandatory fiscal referendum. Such differences can be observedfor most of the variables, the political, the structural and even for the economic ones.Moreover, the results for the Jarque-Bera-Test for the expenditure and revenue equations re-ject the null hypothesis of normality of the residuals on the 5 and 10 percent significance lev-els, respectively, while this hypothesis cannot be rejected for the sub-samples. This reinforcesthe suspicion that there is a structural break between these two sub-samples and further justi-fies the estimation of separate equations.

The dummy variable for the fiscal referendum has the expected negative sign and its coeffi-cient is significantly different from zero in the expenditure and revenue equations, indicatingthat cantonal expenditure are about 7 and cantonal revenue about 11 percent lower in cantonswith fiscal referenda. This implies that the budget deficit is larger in those cantons, which isreflected in – ceteris paribus – higher public debt, though the respective coefficient is not sig-nificantly different from zero. The signature requirement for initiatives has a significantly‘wrong’ sign in the models for the whole sample as well as the sample for the direct democra-cies: A higher signature requirement seems to reduce public expenditure and revenue. On theother hand, the coefficient has the expected positive sign and is highly significantly differentfrom zero in the equations for the representative democracies: If there is no mandatory fiscalreferendum, cantonal expenditure and revenue are the lower the more easily citizens can startan initiative. As all the five cantons with statutory fiscal constraints also have mandatory fis-cal referenda, the effect of these constraints can only be observed for the cantons with direct

23. The cantonal estimates have been performed with LIMDEP, Version 7.0.

– 20 –

democracy. It reduces public spending and increases public revenue. Though these effects arenot statistically significant, the combined negative effect of these fiscal discipline enhancingdevices on public debt is significant. The share of leftist parties in the cantonal parliament hasthe expected positive sign on expenditure and revenue for both sub-samples, but no effect onpublic debt. Thus, the hypothesis that left-wing politicians rely more on state solutions of so-cial problems than right-wing politicians is reflected in these results, but there is no indicationthat in comparison to those they are more relying on public debt than on tax financing of gov-ernment tasks. Finally, the number of parties in the cantonal executive has no significant im-pact at all in any of these equations.

Neither the population itself nor one of the variables describing its structure has a consistentimpact over the different equations. Moreover, the estimated coefficients are in most cases notsignificantly different from zero, and they have in several cases different signs in the two sub-samples. The population has a significant negative impact on revenue in the direct democra-cies. The share of the old population has a significant positive impact on revenue in the repre-sentative democracies, while the share of the young population has a significant (positive) im-pact only on cantonal debt of the direct democracies. Population density has a significantpositive impact on expenditure and revenue in the representative democracies and a signifi-cant negative impact on revenue in the whole sample, while the share of the urban populationhas a significant negative impact in the direct democracies. The share of the French and Italianspeaking population has a positive impact on both, revenue and expenditure, in both sub-sam-ples, but the effect is stronger for expenditure and in the representative democracies. Conse-quently, we also find a significantly positive impact on public debt in those cantons.

Real GDP per capita has a proportional impact on expenditure and revenue in the direct de-mocracies: all estimated coefficient are highly significantly different from zero, but they arenever significantly different from 1.0. Moreover, cantonal debt also seems to develop pro-portionally to real income in those cantons. The picture is quite different, however, for thecantons with representative systems. There, the development of the national GDP also seemsto have a proportional impact on public expenditure, but no impact at all on public revenue,while the difference of the logarithms of cantonal and national GDP per capita has a negativeimpact on both public expenditure and revenue in those cantons. The unemployment rate has apositive impact on spending and revenue in the direct democracies but a negative impact onrevenue in the representative democracies. Finally, lump-sum grants have a positive impact onexpenditure and revenue in both sub-samples, with elasticities between about 10 and 20 per-cent.

Taking all these results together, despite the high multiple correlation coefficients in thespending and revenue equations, we have only few variables with consistent effects in bothsub-samples. As already mentioned above, this might at least partly be due to the fact that thesub-sample for the representative democracies is rather small. On the other hand, the most im-portant results in our context are the significant negative effects of the existence of a manda-tory fiscal referendum on cantonal expenditure and revenue as well as of statutory fiscal con-straints on public debt.

– 21 –

– Table 1a about here –

Table 1a presents the cantonal results in (real) absolute values.24 As mentioned above, thisfunctional form has the advantage that the adding up condition holds. We cannot only com-pute the results for public expenditure, revenue and debt but also for the public deficit.Moreover, we get a more natural interpretation of the results especially for the dummy varia-bles.

According to these estimates, the existence of a fiscal referendum has again a significantlynegative impact on public expenditure and revenue; it reduces cantonal expenditure per capitaby about 275 SFr, reduces cantonal revenue even more by about 480 SFr per capita, and,therefore, increases the cantonal deficit by about 205 SFr per capita. Fiscal constraints are alsovery effective. According to these estimates, Fribourg as the canton with the strongest restric-tions has – ceteris paribus – a lower deficit of about 280 SFr compared to a canton withoutsuch restrictions. The signature requirement for statutory initiatives again has different signsin the two sub-samples, while the share of leftist parties in the parliament which ranges fromzero, e.g. in Schwyz, up to a maximum of 39 percent in some years in Vaud, increases expen-diture up to a maximum of about 1300 SFr per capita and revenue of about 1000 SFr per cap-ita, calculated with the estimates of the common sample. Finally, the variable for the Frenchand Italian speaking population in the equations of the common sample indicates that expen-diture might be nearly 1000 SFr per capita and revenue nearly 800 SFr per capita higher inthese cantons, which results in a higher, but statistically not significant deficit of less than 200SFr per capita.

– Table 1b about here –

Table 1b shows the results of the equations for public debt in absolute terms. As in the loga-rithmic specification, in the equations for the common sample as well as for direct democra-cies we get significant positive impacts of cantonal GDP per capita, of the unemployment rateand of the share of the young population. However, the adjusted multiple correlation coeffi-cients are so small that this model does not explain anything at all. Consequently, the F-Testfor the null hypothesis that all variables together besides the constant term have no significantimpact on cantonal debt cannot be rejected in any of the estimated equations on any conven-tional significance level.

As a last step, we used the model in logarithms for the direct democracies to simulate expec-ted values for expenditure and revenue for the cantons without mandatory fiscal referendum incase they had had such a referendum as well. Because of the dummy variables for Geneva andBasel-City we, of course, had to exclude these observations from the simulations. Accordingto the simulations, public expenditure per capita would have been lower by about 270 SFr percapita or 4.5 percent if this referendum had been at the disposal of the voters in these cantons,

24. The data have been deflated with 1995 = 100.

– 22 –

while public revenue would have been by about 430 SFr per capita or 10 percent lower. Thesedifferences are, however, not significantly different from zero.25

0

2000

4000

6000

8000

5 10 15 20 25 30 35 40 45 50 55 60 65 70

Actual and Simulated Values of Cantonal Public Expenditure (SFr per capita)in Cantons with Representative Democracy

black: actual values white: simulated values

Figure 4

For the case of cantonal expenditure, actual and simulated values are shown in Figure 4. Itshows that 12 of the simulated 71 values are definitely higher than the other 59 ones. Theseare the values of the canton Zug. This canton is well known for being a tax haven attracting‘letter-box firms’ as well as rich people.26 Thus, average (taxable) income in this canton ismuch above the average in the other cantons. Using the coefficients for GDP in the equationsfor the direct democracies would result in much higher public expenditure and revenue than isactually spent and collected. If we exclude the observations of Zug, the expenditure differencebetween the cantons with and without mandatory fiscal referenda is about 560 SFr per capitaor 9.6 percent and of revenue even 1000 SFr per capita or 19 percent. All these values are

25. The corresponding t-Statistics are 1.18 for the difference in expenditure and 1.27 for the difference in reve-nue. If we use the logarithmic formulation to test for the relative differences we get t-Statistics of 1.13 and1.71. Thus, only the relative revenue difference is significantly different from zero and only on the 10 per-cent level.

26. This might be the or at least one reason that in the equations for the representative democracies the log of therelative cantonal income has a significantly negative impact on cantonal expenditure and revenue.

– 23 –

highly significantly different from zero.27 However, because the small number of observations– these are data of only 6 cantons – these results should not be interpreted too strongly.

Summarising the results, there is at least some evidence that fiscal referenda have a dampen-ing impact on cantonal revenue and expenditure and statutory requirements on cantonalbudget deficits. That in some cases the effects are statistically not significant might be a resultof the small number of cross-sections (cantons) which, due to the relative time invariance ofmost political and institutional variables, cannot fully be compensated by the time domain inthe panel analysis. However, there are simply no more cantons available. Thus, if we want tohave more observations in the cross section domain, we have to consider lower level jurisdic-tions. Therefore, in the following we investigate the effects of these variables in local juris-dictions.

4.3 Results for Swiss Local Jurisdictions

To estimate a model for the local jurisdictions we use data of the members of the Swiss Asso-ciation of Local Communities (Schweizerischer Städteverband) for the year 1990. In this year,this association had 137 members: towns and local communities whose population rangesbetween 2300 and 400 000 people. However, despite of several attempts we did not get the in-stitutional data we asked for from three of these communities.28 Moreover, a first investiga-tion of the data revealed that the city of Basel which is also a member of this association is astrong outlier. The reason for this is that the city of Basel and the canton Basel-City are nearlyidentical, i.e. ‘cantonal’ and ‘local’ revenue and expenditure are put together. Thus, thiscity/half-canton is not only an outlier with respect to cantonal but also with respect to localexpenditure and revenue. For similar reasons, we excluded Glarus from our sample, a town of5700 inhabitants in a mountain canton, which is heavily dependent on transfers from its can-ton and the federation, which results in a share of own revenue of only 45 percent, comparedto an average share of 96 percent.29 Thus, excluding the three communities for which data aremissing as well as Basel-City and Glarus we still have 132 observations.30

In principle, we use the same dependent as well as explanatory variables in the model for thelocal communities which we employed in the cantonal model. However, some of the variableswe included in the model for the cantons are not available for the local communities and/or itdoes not make sense to include these variables into the regression equations, like populationdensity or the share of the urban population. Instead of GDP per capita taxable income per

27. The corresponding t-Statistics are 2.77 and 2.55 for the difference in expenditure and 4.93 as well as 4.99 forthe revenue difference.

28. We have not yet received data from the municipalities of Baar (ZG), Onex (GE) and Locarno (TI). Thesecommunities which count, however, only for 0.66 percent of the Swiss population therefore had to be exclu-ded from our sample.

29. The standard deviation is 6.1 percent including and 4.2 percent excluding this observation; the next lowestvalue of this share is 81 percent.

30. This is different for Geneva because this canton which is also an exclusively urban canton consists of severalindependent local communities besides the city of Geneva.

– 24 –

taxpayer is available. Because we perform a cross-section analysis with only one observationperiod (the year 1990) it also does not make sense to include national besides local income inthe equations. On the other hand, we collected information from the local constitutions whichallowed us to construct a variable ‘Agenda’ which ranges from ‘1’ to ‘4’. It indicates whetherthe mayor and/or the head of the finance department of the local government has a strong po-sition in the budgetary process. And finally, we include a dummy variable for the canton Zug(D-Zug). Previous studies have shown that its local communities have significantly lowerpublic debt than those in other cantons.31 This might be due to the fact that this canton has areputation as a tax haven. It might also have implications for expenditure and revenue of thesecommunities. To check this we included this dummy in all estimated equations. Thus, the mo-del we estimated for the Swiss local communities is finally:

(2) X = f (YN, U, Grants, Pop, Old, Young, French, Left, Coal, DD, Agenda, Constr, D-Zug),

where YN is the taxable income per taxpayer and the other variables are as explained above.

Again, we estimated a model in logarithms for expenditure, revenue and debt but also a modelin absolute values for these categories and for the deficit. Contrary to the cantonal estimates,the results of the Chow-Tests did not indicate that there is a structural break between those lo-cal communities with and without fiscal referenda. Thus, we first consider only the estima-tions for the whole sample.

– Table 2 about here –

We start with the results for the log-linear specification which are presented in Table 2.32 Theoverall performance as measured by the adjusted multiple correlation coefficients is below thevalues for the cantonal estimates, but because this is a pure cross-section analysis the share ofthe explained variance seems to be quite satisfactory at least for the expenditure and revenueequations. Moreover, the results of the Jarque-Bera-test indicate that the null hypothesis ofnormality of the residuals cannot be rejected on any conventional significance level.

The dummy variable for referenda on budget deficits has the expected sign in all three equa-tions and is at least significantly different from zero on the 1 percent level. Its value impliesthat expenditure and revenue in local communities with such referenda are about 20 percentlower than in the other communities, while public debt is about 40 percent lower. On the otherhand, fiscal constraints as well as the agenda setting power of the mayor or of the head of thefinancial department in the local government do not seem to have any effect at all. The sameholds for the number of parties in the executive as well as for the share of the non-Germanspeaking population. But contrary to our expectations as well as to the results on the cantonallevel, the share of leftist parties in the parliament has a significantly negative impact which isquite sizeable: It reduces public expenditure and revenue of the local community with the

31. See Feld and Kirchgässner (2001).

32. The estimates for the local communities have been performed with EViews, Version 3.1.

– 25 –

highest share of leftist parties (Birsfelden) compared to one of the several communities with-out any leftist party in their parliament by more than 20 percent. Finally, the dummy variablefor the canton Zug has a significant impact only on public debt, which is however ratherstrong: local communities in Zug have – ceteris paribus – less than 60 percent of the publicdebt per capita than communities in other cantons.

Taxable income as well as the unemployment rate have the expected signs, but the coeffi-cients are never significantly different from zero. This is not as surprising as it might look at afirst glance. With respect to income this only implies that public expenditure and revenue inricher communities are not significantly higher than in poorer communities; as we have men-tioned in the previous section this does not imply that an overall increase in real incomewould not increase local public spending and revenue. Higher unemployment reduces localtax receipts, but unemployment benefits are paid by the central government, it does not neces-sarily increase local public spending. The share of the young population has a significantnegative and the share of the old population has a significant positive impact. This might bemainly due to the fact that a high share of young people – ceteris paribus – reduces tax re-ceipts of the community, while many of the old people are ‘good’ taxpayers. Thus, due to thesimultaneous decision over local revenue and spending in the budgetary process these coeffi-cients more strongly reflect the financing aspect of the budget than the demand for local pub-lic services. Finally, the share of own revenue of the local community has a significant posi-tive impact on spending and revenue, i.e. the higher the share of free grants from the higherfederal levels, the lower is total public expenditure and revenue. This might reflect the factthat such grants are mainly given to ‘poor’ communities but that they are only partly filling thegap between ‘poor’ and ‘rich’ communities.

– Table 2a about here –

Table 2a presents the results in absolute values. The expenditure and revenue equations areagain explained by about 40 percent, the multiple correlation coefficient in the debt equationis nearly thirty percent, while this model – similar to the cantonal estimations – is hardly ableto explain the local public deficit. There are only two variables in this equation which have asignificant impact, population and fiscal constraints. Population increases the deficit by 1.5SFr per 1000 inhabitants, which implies, e.g., that Zürich as the largest Swiss city with365’000 inhabitants has – ceteris paribus – a debt which is about 550 SFr per capita higherthan the deficit in Arosa which is the smallest local community in our sample with only 2300inhabitants. Thus, it is not astonishing that with 37’000 SFr per capita Zürich has one of thelargest local public debts in Switzerland.

The more important variable in our context is, however, the fiscal constraint. Contrary to theresults of all other equations it has a significant impact for the fiscal deficit: Depending on thestrength of this constraint this reduces the deficit up to about 250 SFr per capita. On a firstglance, this does not seem to be very much. Compared with the average deficit of 100 SFr thisis, however, quite a lot. Actually, those 9 local communities with the strongest restrictions hada balanced budget on the average in 1990, those 23 communities which had at least some re-

– 26 –

strictions had a deficit of 38 SFr per capita, while the remaining 114 communities without anysuch constraints had an average deficit of 137 SFr per capita. This is at least another indica-tion that such constraints have a real effect.

In the expenditure, revenue, and debt equations the significance of the political variable doesnot change. According to these estimates, the existence of a fiscal referendum reduces localexpenditure and revenue by about 600 SFr and reduces debt by about 4’400 SFr per capita.Differences occur, however, with respect to taxable income and to the size of the local com-munity. About 10 percent of additional income is spent for public expenditure. Given the factthat the average ratio between local public expenditure (and revenue) and taxable income isabout 8 percent, this implies that the relation between local public expenditure and public in-come is more or less proportional; the estimated marginal spending rate is at least not signifi-cantly higher than the average rate. The significant impact of the population variable indicatesthat expenditure in large cities is higher due additional tasks. Cost savings from economies ofscale in the production of the public services do not appear to be dominant. – With respect toall other variables, there are no differences between the logarithmic and the linear functionalform which are to be mentioned.

– Table 3 about here –

As a last step, like in the case of the cantonal estimates, we use the model in logarithms to per-form simulations for the communities without referenda on fiscal deficits in case they had hadsuch a referendum as well. We calculated expected values for local expenditure, revenue, andpublic debt.33 To do so, we first again had to re-estimate the equations for the subsample witha referendum on public deficits. The estimates are given in Table 3. As can be seen from thistable, while the values of adjusted multiple correlation coefficients are somewhat higher, thereare only small differences between these estimates and the estimates for the whole samplegiven in Table 2, while the significances are generally somewhat lower, mainly due to thesmaller number of observations.

33. Due to the extremely low value of the multiple correlation coefficient, it did not make sense to perform suchsimulations also for the public deficit. Moreover, when we estimated this equation for the subsample of localcommunities with such a referendum, despite the fact that the variable for the fiscal constraint still had aneconomically meaningful and statistically significant impact, the adjusted multiple correlation coefficient waseven negative.

– 27 –

To perform the simulations we had to exclude the two observations of local communities inthe canton Zug because they do not have referenda on public deficits. Thus, there are 46 ob-servations remaining. According to these simulations local public expenditure would havebeen about 860 SFr and revenue about 820 SFr, both about 21 percent lower. Despite the fact

that these reductions have nearly the same (absolute as well as relative) size and, therefore,could only have a small impact on the public deficit, we also find a considerable reduction ofpublic debt: It would have been about 5600 SFr per capita lower, which is also one third. Allthese differences are not only economically very important, but also statistically highly sig-nificant.34

For expenditure and revenue, actual and predicted values for these 46 local communities areshown in Figures 6 and 7. The graphs show that the predicted values are only in few caseslarger than the actual values. On the other hand, they also show that the model for the localcommunities with referenda on the budget deficit does not explain the situation in the com-munities without such a referendum very well.35

34. The corresponding t-statistics are 5.17 and 5.40 for expenditure, 5.94 and 5.97 for revenue and 4.88 as wellas 4.10 for the debt, always for the absolute and the relative differences.

35. The adjusted R2-measures are 0.234 for expenditure, 0.247 for revenue and only 0.048 for public debt.

0

2000

4000

6000

8000

5 10 15 20 25 30 35 40 45

Actual and Simulated Values of Local Public Expenditure (SFr per capita)

in Local Communities with Representative Democracy

black: actual values white: simulated values

Figure 5

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4.4 A Discussion of the Empirical Results in the Light of Existing Estimates

According to our analysis in the previous sections, direct legislation in Switzerland is basi-cally characterised by two features: First, public spending, revenue and debt are statisticallydifferent in a direct democracy than in representative democracies. Second, the fiscal referen-dum is associated with lower spending and revenue and with lower public debt. Hence, Hy-pothesis 1 must be rejected: There are significant differences between jurisdictions with andwithout instruments of direct democracy, referenda and initiatives are not simply institutionalveils. Referenda and initiatives matter. In addition our results indicate that fiscal referendahave teeth: Spending, revenue and public debt are lower if fiscal referenda exist such that Hy-pothesis 1a cannot be rejected. How do these results compare to others in the literature? Andhow efficient are these economic policy outcomes in more general terms?

Systematic analyses of the impact of referenda and initiatives on economic policy are avail-able for Switzerland and for the U.S. states.36 For the U.S. states Matsusaka (1995) providesthe most convincing evidence. He reports that spending per capita and year of states with ini-tiatives was 55 – 110 U.S. Dollar lower (on average about 4 percent) depending on the signa-

36. The results of the Swiss studies are summarised in Table A1 and those for the U.S. in Table A2 in the Ap-pendix. For a more detailed description of these studies, see Kirchgässner, Feld and Savioz (1999, Chap. 5)as well as Feld and Kirchgässner (2000).

0

2000

4000

6000

8000

5 10 15 20 25 30 35 40 45

Actual and Simulated Values of Local Public Revenue (SFr per capita)

in Local Communities with Representative Democracy

black: actual values white: simulated values

Figure 6

– 29 –

ture requirement for the initiative. At a signature requirement of 10 percent of the population,the impact of the initiative on spending becomes insignificant. For the period before the Sec-ond World War, Matsusaka (2000) finds however higher public spending in initiative states ina similar research design as in his previous study. In a panel of 48 U.S. states in the years1902, 1913, 1932 and 1942, spending per capita and year of states with initiatives was 11 per-cent higher. The conclusion the author provides for these differences in his results for bothtime periods is that the anti-spending impact of initiatives is not a certain policy outcome. Ini-tiatives serve citizens as instruments to correct policy outcomes in direction of their prefer-ences if they deviate from them. If citizens are more liberal (in the American sense) than rep-resentatives, this leads to higher spending in states in which an initiative is available. If votersare more conservative than representatives, they reduce government spending by the initiative.Interestingly enough, centralisation of spending was reduced in the U.S. states with initiatives:State spending was less than local spending in those states. Since local spending is closer tocitizens than state spending and enables them to control spending more strongly, this evidencesupports the conjecture that spending outcomes come closer to citizens’ preferences in stateswith initiatives.

According to the results of more recent studies, Swiss citizens seem to be more fiscally con-servative than their U.S. counterpart. Feld and Kirchgässner (1999) report that those citieswith budgetary referenda out of a sample of 131 large Swiss cities in 1990 spent 14 percentless than the cities without such a referendum. The results of Feld and Matsusaka (2000) forthe 26 Swiss cantons during the period 1986 to 1997 are in line with the local estimates. Onaverage, spending in cantons with a fiscal referendum is 390 SFr per capita lower. The impactof the fiscal referendum on spending can be differentiated according to the spending thresh-old. Expenditure per capita is 917 SFr lower in cantons with fiscal referenda for the cantonwith the median spending threshold of 3 million SFr. The fiscal referendum is still restrictivefor a spending threshold of 15 million SFr. It becomes zero at a threshold of 25.8 million SFr.

The results from Section 4.2 deviate somewhat from these estimates. We obtain lower (net)expenditure per capita of 275 SFr for cantons with fiscal referenda, if formal fiscal restraintsare additionally considered and outliers are excluded. The log linear estimates show thatspending per capita is reduced by 6.5 percent because of the fiscal referendum. More impor-tantly, the significant differences in the spending model between cantons with and without fis-cal referenda lends indirect support to the hypothesis that the fiscal referendum correctsspending outcomes towards the preferences of the median voter. The possibility to deviatefrom voters’ preferences might give incentives to representatives either to spend too much ortoo little. The estimates of the local spending model from Section 4.3 also corroborate theseresults. Net local public spending is reduced by 20 percent (600 SFr per capita on average) if areferendum on the issue of new bonds is present in a cities constitution.

While there are also mixed results for revenue of U.S. states for the two periods studied byMatsusaka, the results for Swiss cantons and cities is quite strong. Our estimates reported inSection 4.2 indicate that cantonal (net) revenue per capita is significantly lower in cantons andcities with fiscal referenda. Quantitatively, the impact is also non-negligible: It is 11 percent

– 30 –

lower in the cantonal case and 20 percent lower in the case of the cities. According to Feldand Kirchgässner (1999) the cities had however a revenue share from taxes and user charges,as opposed to transfers and subsidies from other government levels, that was 5 percent higher,and they levied an income tax on the median income that was 14 percent higher. In addition,the U.S. states with initiatives and the cantons rely more on user charges than on broad-basedtaxes.37

Direct democratic cities in Switzerland also have lower public debt. Feld and Kirchgässner(1999) simulate that those cities where the citizens have no direct rights with respect to budg-etary decisions, public debt per capita would – ceteris paribus – have been about SFr 10,000and thus 45 percent lower in 1990 than if these cities had had a direct democratic organisa-tion.38 These results are again corroborated in different econometric models by Feld andKirchgässner (2001) and by the estimates in Section 4.3. Local public debt is reduced by4’400 SFr per capita. The cantonal estimates are however less convincing. There is no sig-nificant difference in public debt between cantons with and without fiscal referenda, whilebudget deficits of the cantons with fiscal referenda are even significantly higher than those ofcantons without fiscal referenda. Similar results as in the Swiss local case can again be ob-tained for U.S. states.39 Kiewiet and Szakaly (1996) provide evidence that states with a refer-endum on new bonds had a guaranteed debt per capita between 1961 and 1990 that was 33percent lower.

All in all, the evidence with respect to public spending, revenue, deficit and debt suggests thatcitizens demand fewer public services and seem to follow a sounder fiscal policy in systemswith direct legislation than in parliamentary democracies. This results in a lower public debtper capita under direct democracy. Thus, a referendum democracy appears to fit Wicksell’s(1896) idea of a link between the tax price and public services better than a purely parliamen-tary system.

The question remains, however, whether the lower level of public spending also leads to amore efficient public sector. Very few studies attempt to investigate this question.40 Pom-merehne (1983) analysed costs and prices of local garbage collection in 103 Swiss cities in1970. He found that average refuse collection costs (per household) were – ceteris paribus –lowest in cities with direct legislation and private garbage collection. These costs were about10 percent higher when garbage collection was organised privately instead of publicly. In cit-ies with representative democracy the costs of private garbage collection were about 20 per-

37. See Matsusaka (1995) for the states and Feld and Matsusaka (2000a) for the cantons.

38. Excluding Zurich, as an outlier with an extremely high debt, the simulated difference was still SFr 4500 or 24percent, respectively. Neither formal fiscal restraints, nor a budgetary process with a strong role of the mayoror the secretary of finance, succeed in putting such a strong constraint on debt issuing.

39. Bohn and Inman (1996) present evidence that formal fiscal restraints in U.S. states were successful, if theywere controlled by constitutional courts of the states. Judges who were directly elected by the citizens ratherthan being nominated by legislators more thoroughly enforced balanced budget rules.

40. An exception is Noam (1980) finding higher efficiency in direct democracies. The efficiency measure usedis, however, not very telling.

– 31 –

cent higher than in direct democracies. Average costs of garbage collection were highest incities with representative democracy and public organisation (30 percent higher than in thefirst case). This provides some evidence that direct legislation enhances the efficiency of thepublic sector. Together with the results on budgetary policy, this is evidence in favour of thehypothesis that direct legislation in Switzerland results in less leeway of representatives topursue their own interests although these results should not be stressed too much.

Pommerehne and Weck-Hannemann (1996) derive interesting results with respect to tax mo-rale. They present evidence that tax evasion is lower in those Swiss cantons in which citizenshave an impact on budgetary policy in direct legislation. Using data for the years 1965, 1970and 1978, they show that in those cantons tax evasion is – ceteris paribus – about SFr 1500lower as compared to the average of the cantons without such direct influence.41 According toFeld and Frey (2001), the higher tax morale in Swiss cantons with direct democracy is also aresult of the fact that tax administrations treat their citizens more respectfully than their col-leagues in representative democracies. Citizens are rather seen as partners in a psychologicaltax contract than potential cheaters on the tax code. If, however, the willingness to pay taxes isthe higher the more satisfied citizens are with public services supplied, then these results areevidence for a higher satisfaction of citizens and, therefore, for greater efficiency of the provi-sion of public services. Both, the results concerning tax evasion as well as the stronger linkbetween tax prices and public services in direct democracy, indicate that Swiss citizens feelmore responsible for their community. They might be more willing to accept decisions thatlead to an income or wealth loss for themselves than citizens of representative democracies.

These studies lend support for the hypothesis that direct democratic systems are more efficientthan representative democratic ones. A more efficient political system should also lead tobetter economic performance. Feld and Savioz (1997) study the relationship between budget-ary referenda and economic performance of Swiss cantons measured by GDP per employee. Ina panel with annual data from 1984 to 1993 for the 26 Swiss cantons, they arrive at the con-clusion that GDP per employee is – ceteris paribus – by about 5 percent higher in those can-tons with budgetary referenda compared to cantons without those referenda. This result istested in various ways for robustness. In particular, reversed causality is tested under the hy-pothesis that richer cantons can afford more direct legislation. On the basis of the empiricalresults, this hypothesis could be rejected. Moreover, the impact of direct democracy is hardlydiminished if additional explanatory variables are included in the empirical model. Againthere is corroborating evidence for the U.S. states. Blomberg and Hess (2000) report thatstates with initiatives converged with a growth rate that was 3 percentage points higher thantheir companion states with no initiative during the period 1969 to 1986. Finally, Frey andStutzer (2000, 2000a) even present evidence that people in Switzerland perceive themselvesas more satisfied with their life as a whole in direct democratic cantons keeping income levelsand other controls constant.

41. There are also theoretical arguments why citizens in direct democracies evade taxes to a lesser extent thanthose in representative democracies. See Pommerehne, Hart and Feld (1997) and Feld and Frey (2001).

– 32 –

5 Policy Implications and Concluding Remarks

In this paper, we have discussed theoretical arguments as to why referenda and initiatives re-strict representatives towards citizens’ preferences. While the information advantage of rep-resentatives in a pure parliamentary democracy might be less decisive than expected, citizensin a representative democracy with instruments of direct democracy have the ability to controltheir representatives more effectively than citizens in a purely representative democracy. Areferendum enables them to correct policy outcomes developed by the government or theparliament, while the initiative serves as a means to create policies that are fully neglected bythe political establishment. We present evidence on Swiss fiscal outcomes at the cantonal andlocal levels showing that significant differences between jurisdictions with and without fiscalreferenda actually exist. The fiscal referendum in Switzerland results in lower spending, lowerrevenue and lower(local) public debt. A fiscal referendum of the form used in Switzerland ob-viously matters. Additional evidence discussed in the end of the previous section moreoversupports the hypothesis that policy outcomes are closer to the preferences of the citizens andthat economic policy outcomes are more efficient in direct than in representative democracies.Although some questions remain to be addressed by future research, the results of the analysisof direct democracy indicates that the introduction of fiscal referenda is an improvement ofbudgetary procedures in purely parliamentary democracies.

This also holds in the case of the European Union in which the budget is still not decided verytransparently for European citizens. This could be changed if fiscal referenda were introduced.Following the Swiss example, an EU-wide budget or fiscal referendum should be binding andrequired. In order to represent the different member countries in addition to citizens we pro-pose a ‘double’ majority of EU citizens and of the electorates of the member countries for theadoption of policies that entail important financial consequences. Both majorities should besimple majorities in addition to the current decision-making requirement in the different EUdecision-making procedures. Such a required referendum with a double majority introduces anadditional player in the political game. This should result in more stable policies and treatyprovisions in questions with financial importance. In cases, representatives systematically de-viate from the preferences of citizens they would be restricted to what their voters want.

The objects covered by the referendum are those with important financial implications. It isbeyond the scope of the paper to enumerate all the different instances of which we think thatthey should be covered. One possibility is an EU-wide decision on the financial perspectivesundertaken every five years as the general guidelines for budget allocations. As mentionedabove, the financial perspective fixes the rules guiding budgetary outcomes like the upperspending limit of the EU budget in percent of GDP or the percentage rate of VAT revenue theEU obtains from the harmonised VAT base of the member countries. Another, more ambi-tious possibility for fiscal referenda at the EU level could be at the revenue side. The ‘third re-source’ based on the value added tax could be reformed such that the EU is allowed to raisethe revenue equivalent of the third resource by a surcharge on VAT revenue of the memberstates. Such a reform would give the EU a restricted power to tax. EU citizens should be al-

– 33 –

lowed to vote on the introduction of this tax and on future changes of the rate in a referendum.Citizens would only adopt the proposal of a tax rate increase if they were convinced of theneed of the tax hike and/or expected to obtain benefits from the policy financed by it.

Like in many Swiss cantons, with respect to spending projects, it would be useful to specify aspending threshold above which new projects or new funds have to be decided by a fiscal ref-erendum. Any new spending project, like the creation of the cohesion fund comprised one,should be decided by citizens in a referendum if a certain spending threshold is exceeded. TheSwiss experience shows that such a procedure has teeth and entails representatives to conductsound fiscal policies. At the Swiss central level policy-makers aim at introducing an optionalfiscal referendum on new projects as well. If the Swiss federal level is able to learn from thecantons, why should the EU not be able to learn from a country the history of which looks likea potential example for the creation of a European federal state?

Aside the enhanced control of representatives by citizens, the introduction of referenda andinitiatives at the EU level is sometimes supposed to have additional indirect advantage. Oneof the most often criticised shortcomings of EU decision-making is its so-called democracydeficit. Elements of direct democracy at the EU level are supposed to lead to the formation ofa European demos interpreted as a common European political conscience of the citizens inthe individual member states. This might help to develop a common policy understanding. Inthis case, Switzerland is again an inspiring example. After the Swiss civil war in 1847 a fed-eral state was created which could not rely on a national demos: A Swiss demos did not existthen. Only cantonal demoi could be observed. According to Hug (2000, chap. 6), the elementsof direct democracy in the Swiss constitution contributed to the development of a Swissdemos.

Hug (2000) also outlines clearly, however, that the hopes of an EU-wide referendum formingan EU demos should not be exaggerated. Two caveats in drawing an analogy between 19th

century Switzerland and the EU are particularly in place: First, elements of direct democracy,for instance the fiscal referendum we propose for the EU, might be helpful but are neithernecessary nor sufficient for a European demos to emerge. It is too little known about themechanisms that lead citizens to overthrow positions that are based on their narrow (nationalor cantonal) interests and instead adopt more general positions. For Switzerland, the empiricalresults on differences in tax evasion between cantons with and without referenda indicate thata referendum might shape such a transformation of interests. It might, however, also be thatnational interests prevail and are exacerbated by EU-wide referenda for instance if referendumoutcomes frequently follow along the distinction between poor and rich member countries.Second, it is obvious that at least in some member countries citizens are not yet ready to ac-cept majority decisions at the EU level. Consider for instance an increase in tax rates in orderto finance additional funds for Eastern European countries on a larger scale. Within the singlemember states, such a regional redistribution, say from Northern Italy to the Mezzogiorno, isaccepted by the citizens paying for it because a national feeling of mutual solidarity exists. Atthe European level, a corresponding consciousness is still lacking. Thus, at the moment a cor-responding proposal would probably be rejected by the people. However, like in Switzerland

– 34 –

in the 19th century, the introduction of referenda could help to develop such a consciousnesswhich might help that in the longer run redistributional measures would be accepted by theEuropean citizens also at the European level.

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– 38 –

Table 1: Net Cantonal Public Expenditure, Revenue and Debt, 1986 – 1997 (Model in Logarithms)

Dependent VariableNet Canto-nal PublicExpendi-

ture

Net CantonalPublic Ex-

penditure forDirect De-mocracies

Net CantonalPublic Expen-diture for Rep-

resentativeDemocracies

Net Canto-nal PublicRevenue

Net CantonalPublic Reve-nue for Di-

rect Democ-racies

Net CantonalPublic Revenuefor Representa-

tive Democracies

Cantonal Pub-lic Debt

Cantonal Pub-lic Debt for

Direct Democ-racies

Cantonal PublicDebt for Repre-

sentative Democ-racies

constant -3.772(1.28)

-4.918(*)(1.89)

-4.350(*)(1.72)

3.079(0.95)

-1.753(0.58)

4.375*(2.05)

-17.288(1.57)

-3.896(0.30)

-20.275(0.97)

log of difference incantonal and nationalGDPs

0.500**(5.00)

0.875**(10.45)

-0.212(*)(1.82)

0.450**(4.48)

0.974**(12.76)

-0.154(1.46)

1.015**(3.18)

1.460**(2.93)

-0.283(0.33)

unemploymentrate

0.014**(2.92)

0.017**(4.33)

-0.003(0.71)

0.006(1.15)

0.013*(2.85)

-0.014**(3.64)

0.055**(2.84)

0.085**(3.62)

-0.026(0.73)

log of population -0.013(0.99)

-0.004(0.36)

0.066(1.16)

-0.023*(2.06)

-0.021*(2.24)

0.052(1.11)

0.045(0.97)

0.008(0.15)

0.164(0.35)

populationdensity

-0.004(1.49)

-0.002(0.49)

0.027**(2.73)

-0.007*(2.40)

-0.003(0.95)

0.025**(3.85)

-0.012(1.14)

-0.003(0.29)

0.069(1.15)

share of oldpopulation

0.016(*)(1.78)

0.004(0.50)

0.002(0.13)

0.021*(2.22)

0.009(1.18)

0.026(*)(1.71)

0.045(*)(1.77)

0.057(*)(1.84)

-0.076(0.76)

share of youngpopulation

-0.019(*)(1.84)

-0.004(0.52)

0.003(0.18)

-0.014(1.26)

0.015(*)(1.66)

0.015(1.29)

0.103**(3.08)

0.122**(3.14)

-0.041(0.42)

share of urbanpopulation

-0.003**(2.75)

-0.004**(5.69)

0.005*(2.15)

-0.001(1.11)

-0.003**(3.35)

0.006**(3.20)

0.002(0.38)

0.001(0.21)

-0.017(0.96)

log of lump-sumgrants per capita

0.094*(2.21)

0.122**(3.40)

0.083*(2.58)

0.133**(3.24)

0.232**(5.48)

0.072**(2.79)

-0.297(*)(1.93)

-0.232(1.20)

0.050(0.15)

share of leftist partiesin the parliament

0.006**(3.74)

0.010**(7.18)

0.016**(7.99)

0.005**(3.38)

0.011**(8.13)

0.011**(5.79)

0.003(0.65)

-0.002(0.37)

0.007(0.37)

number of partiesin the executive

0.010(0.71)

-0.282(*)(1.81)

-0.009(0.57)

0.022(1.38)

-0.021(1.17)

-0.001(0.03)

-0.062(1.00)

0.072(0.80)

-0.132(1.26)

– 39 –

Table 1: Net Cantonal Public Expenditure, Revenue and Debt, 1986 – 1997 (Model in Logarithms)

Dependent VariableNet Canto-nal PublicExpendi-

ture

Net CantonalPublic Ex-

penditure forDirect De-mocracies

Net CantonalPublic Expen-diture for Rep-

resentativeDemocracies

Net Canto-nal PublicRevenue

Net CantonalPublic Reve-nue for Di-

rect Democ-racies

Net CantonalPublic Revenuefor Representa-

tive Democracies

Cantonal Pub-lic

Debt

Cantonal Pub-lic Debt for

Direct Democ-racies

Cantonal PublicDebt for Repre-

sentative Democ-racies

dummy for fiscalreferenda

-0.065*(2.14)

– – -0.113**(3.87)

– – 0.059(0.61)

– –

signature requirementfor statutory initiative

-0.086**(4.51)

-0.095**(4.26)

0.108**(4.81)

-0.091**(5.86)

-0.075**(3.74)

0.061**(3.88)

0.007(0.11)

0.118(1.48)

-0.042(0.28)

fiscal constraints -0.003(0.23)

-0.816(0.94)

– 0.017(1.24)

0.013(1.48)

– -0.848*(2.15)

-0.070(*)(1.83)

–

dummy for Frenchlanguage

0.159**(3.62)

0.130*(2.50)

0.185**(2.90)

0.120**(2.73)

-0.004(0.08)

0.183**(4.24)

0.166(0.85)

-0.033(0.15)

0.965*(2.03)

dummy for cantonBasel-Stadt

0.704**(5.06)

– -0.233(0.63)

0.813**(5.43)

– -0.305(1.20)

0.179(0.39)

– -1.844(0.84)

dummy for cantonGenf

0.790**(13.42)

– 0.121(0.64)

0.788**(12.18)

– 0.104(0.84)

0.979(0.43)

– -1.205(0.94)

log of national GDP 1.113**(4.63)

1.210**(5.58)

0.912**(4.31)

0.465(*)(1.74)

0.815**(3.33)

0.093(0.55)

2.191*(2.33)

0.928(0.86)

2.609(1.56)

2R 0.917 0.774 0.983 0.902 0.702 0.985 0.046 0.073 0.026

SER 0.097 0.085 0.057 0.100 0.089 0.051 0.502 0.496 0.508

Jarque-Bera 7.034* 1.374 0.650 4.708(*) 4.087 0.139 90.446** 43.083** 39.490

Chow-Test ( F ) 16.000** – – 18.333** – – 1.644(*) – –

Observations 312 217 95 312 217 95 312 217 95

The numbers in parentheses are the absolute values of the estimated t-statistics, based on the Newey-West autocorrelation-consistent standard errors. ‘**’, ‘*’ or ‘(*)’ show significance on the 1, 5, or 10percent level, respectively. All financial variables are in 1995 Swiss francs.

– 40 –

Table 1a: Net Cantonal Public Expenditure, Revenue, and Deficit, 1986 – 1997 (Model in Absolute Values)

Dependent VariableNet Cantonal

PublicExpenditure

Net CantonalPublic Expen-diture for Di-rect Democra-

cies

Net CantonalPublic Expen-

diture forRepresenta-

tive Democra-cies

Net CantonalPublic

Revenue

Net CantonalPublic Reve-

nue for DirectDemocracies

Net CantonalPublic Reve-nue for Rep-resentative

Democracies

CantonalPublicDeficit

CantonalPublic Deficit

for DirectDemocracies

CantonalPublic Deficit

for Repre-sentative De-

mocracies

constant -330.565(0.12)

2215.222(0.94)

-15504.192**(2.68)

3936.686(1.32)

-411.233(0.16)

-6464.086(1.03)

-4267.251*(2.45)

2626.455(*)(1.79)

-9040.106*(2.42)

difference in cantonaland national GDPs

0.063**(6.56)

0.103**(10.25)

0.024(1.20)

0.048**(4.56)

0.112**(11.87)

0.015(1.03)

0.015*(2.39)

-0.009(1.41)

0.009(0.60)

unemploymentrate

84.872**(3.47)

76.798**(3.97)

65.695(*)(1.92)

13.952(0.52)

44.463**(2.04)

-39.240(1.34)

70.920**(5.30)

32.335*(2.46)

104.936**(3.32)

population 0.101(0.68)

0.083(0.65)

-0.352(0.42)

-0.106(0.63)

-0.182(1.46)

-0.949(1.37)

0.206*(2.04)

0.265**(2.84)

0.597(0.73)

populationdensity

-21.028(*)(1.78)

-2.728(0.23)

21.130(0.26)

-32.149*(2.18)

-9.845(0.84)

25.041(0.49)

11.121(1.27)

7.117(1.04)

-3.911(0.07)

share of oldpopulation

75.219(*)(1.96)

-28.174(0.82)

75.448(0.66)

88.891(*)(1.92)

2.768(0.08)

186.799(1.47)

-13.672(0.62)

-30.942(1.60)

-111.352(1.24)

share of youngpopulation

-59.982(1.44)

-32.182(0.91)

129.329(1.27)

-73.584(1.47)

64.054(1.60)

73.124(0.67)

-13.601(0.51)

-96.236**(4.60)

56.205(0.85)

share of urbanpopulation

-14.063**(3.47)

-26.083**(6.79)

32.639*(2.58)

-7.884(1.53)

-17.721**(4.56)

23.150*(2.28)

-6.179*(2.37)

-8.362**(2.86)

9.490(1.03)

lump-sumgrants per capita

0.483(1.23)

0.999*(2.51)

0.013(0.02)

1.032*(2.42)

2.240**(5.18)

0.505(1.24)

-0.549**(2.66)

-1.241**(4.63)

-0.492(1.27)

share of leftist partiesin the parliament

33.085**(4.82)

55.915**(8.13)

122.582**(8.79)

26.743**(3.16)

61.135**(8.72)

94.436**(7.47)

6.343(1.22)

-5.220(1.18)

28.146(*)(1.83)

number of partiesin the executive

-2.004(0.03)

-211.183*(2.72)

-66.546(0.52)

59.497(0.77)

-172.282*(2.08)

24.354(0.20)

-61.501(1.45)

-38.901(0.76)

-90.900(0.81)

– 41 –

Table 1a: Net Cantonal Public Expenditure, Revenue, and Deficit, 1986 – 1997 (Model in Absolute Values)

Dependent VariableNet Cantonal

PublicExpenditure

Net CantonalPublic Expen-diture for Di-rect Democra-

cies

Net CantonalPublic Expen-diture for Re-presentativeDemocracies

Net CantonalPublic

Revenue

Net CantonalPublic Reve-

nue for DirectDemocracies

Net CantonalPublic Reve-nue for Rep-resentative

Democracies

CantonalPublicDeficit

CantonalPublic Deficit

for DirectDemocracies

CantonalPublic Deficit

for Re–presentativeDemocracies

dummy for fiscalreferenda

-275.710*(1.98)

– – -479.811**(3.26)

– – 204.101**(2.95)

– –

signature requirementfor statutory initiative

-493.447**(6.83)

-474.678**(6.73)

416.851**(3.03)

-513.776**(7.23)

-411.284**(6.07)

199.708(*)(1.92)

20.329(0.48)

-63.393(*)(1.66)

217.143(*)(1.88)

fiscal constraints -51.531(1.08)

-63.314(*)(1.71)

– 41.414(0.65)

28.546(0.77)

– -92.945**(3.54)

-91.859**(5.02)

–

dummy for Frenchlanguage

1023.095**(5.61)

658.577**(3.24)

648.881(1.23)

835.074**(4.04)

55.786(0.25)

557.866(*)(1.72)

188.021(*)(1.71)

602.790**(5.31)

91.015(0.21)

dummy for cantonBasel-Stadt

7533.307**(10.53)

– 6524.839*(2.43)

7898.569**(9.89)

– 5368.078**(2.85)

-365.262(0.71)

– 1156.761(0.80)

dummy for cantonGenf

7085.317**

(25.56)

– 5667.391**(3.80)

6349.644**(17.51)

– 5007.155**(5.13)

735.673**(2.95)

– 660.237(0.63)

national GDP percapita

0.116**(6.14)

0.120**(8.74)

0.144**(4.17)

0.052**(2.72)

0.103**(6.56)

0.032(1.36)

0.064**(4.88)

0.017*(2.03)

0.112**(4.96)

2R 0.961 0.798 0.986 0.955 0.715 0.987 0.516 0.475 0.668

SER 520.436 382.766 454.973 518.396 403.547 400.654 338.909 251.074 406.234

Jarque-Bera 2.680 0.701 3.858 5.773(*) 7.613* 0.508 40.314** 5.575(*) 6.951*

Chow-Test ( F ) 31.140** – – 29.989** – – 5.911** – –

Observations 312 217 95 312 217 95 312 217 95

The numbers in parentheses are the absolute values of the estimated t-statistics, based on the Newey-West autocorrelation-consistent standard errors. ‘**’, ‘*’ or ‘(*)’ show significance on the 1, 5, or 10percent level, respectively. All financial variables are in 1995 Swiss francs.

– 42 –

Table 1b: Cantonal Public Debt, 1986 – 1997 (Model in Absolute Values)

DependentVariable

Cantonal PublicDebt

Cantonal Public Debtfor Direct Democracies

Cantonal Public Debt for Rep-resentative Democracies

constant -32142.497(*)(1.86)

-32289.642(1.53)

12714.434(0.30)

difference in cantonaland national GDPs

0.165**(2.53)

0.304**(2.76)

-0.207(1.43)

unemploymentrate

471.610**(2.82)

696.807**(3.48)

-202.927(0.56)

population 0.300(0.28)

-0.560(0.44)

0.545(0.05)

populationdensity

-100.119(1.19)

-28.004(0.29)

531.932(0.86)

share of oldpopulation

362.508(1.63)

418.099(1.57)

-696.577(0.74)

share of youngpopulation

751.676**(2.67)

952.856**(2.90)

-540.099(0.72)

share of urbanpopulation

12.677(0.40)

-3.768(0.10)

-150.692(1.22)

lump-sumgrants

-4.840(*)(1.93)

-4.833(1.65)

5.686(0.82)

share of leftist partiesin the parliament

32.601(0.82)

14.329(0.26)

77.660(0.41)

number of partiesin the executive

-262.015(0.49)

-651.385(0.88)

-834.834(0.76)

dummy for fiscalreferenda

-13.130(0.02)

– –

signature requirementfor statutory initiative

192.482(0.37)

868.75o(1.44)

-581.210(0.56)

fiscal constraints -522.683(*)(1.75)

-508.952(*)(1.73)

–

dummy for Frenchlanguage

425.505(0.26)

-780.371(0.42)

7498.559(1.42)

dummy for cantonBasel-Stadt

-1164.107(0.29)

– -6904.899(0.32)

dummy for cantonGenf

674.512(0.33)

– -6617.017(0.51)

national GDP 0.263*(2.48)

0.246(*)(1.85)

0.092(0.55)

2R 0.022 0.062 -0.030

SER 4290.368 4114.650 4626.190

Jarque-Bera 902.488** 606.434** 187.754**

Chow-Test ( F ) 1.439 – –

Observations 312 217 95

The numbers in parentheses are the absolute values of the estimated t-statistics, based on the Newey-West autocorrelation-consistent standard errors. ‘**’, ‘*’ or ‘(*)’ show significance on the 1, 5, or 10 percent level, respectively. All financialvariables are in 1995 Swiss francs.

– 43 –

Table 2: Local Expenditure, Revenue and Debt per Capita, 1990(Model in Logarithms, 132 Observations)

Dependent VariableLocal Public Ex-

penditureLocal Public

Revenue Local Public Debt

constant 7.041**(7.08)

6.962**(6.49)

9.722**(4.53)

log of average taxable income 0.201(1.09)

0.228(1.14)

-0.392(0.97)

unemployment rate -0.086(0.85)

-0.080(0.93)

0.080(0.53)

log of population 0.232(1.20)

0.253(1.23)

-0.288(0.69)

share of youngpopulation

-0.044**(3.68)

-0.044**(3.77)

-0.008(0.36)

share of oldpopulation

0.021**(2.65)

0.015(*)(1.87)

0.035*(2.30)

share of ownrevenue

0.014**(2.69)

0.013*(2.97)

0.019(*)(1.79)

dummy of referenda on budgetdeficits

-0.209**(4.19)

-0.210**(4.65)

-0.313**(3.24)

fiscal constraints -0.013(0.52)

0.007(0.35)

-0.009(0.20)

agenda settingpower

0.012(0.51)

0.015(0.72)

-0.003(0.06)

number of parties in the execu-tive

0.002(0.05)

-0.001(0.04)

-0.051(0.89)

share of leftist parties in theparliament

-0.005**(3.76)

-0.005**(3.63)

-0.005(*)(1.79)

dummy for French and Italianlanguage

0.148(1.60)

0.099(1.29)

0.310(*)(1.85)

dummy for canton Zug 0.070(1.02)

0.088(1.40)

-0.566**(2.39)

2R 0.404 0.408 0.183

SER 0.248 0.228 0.480

Chow-Test ( F ) 1.931(*) 1.459 1.489

J.-B. 1.260 1.957 1.303

The numbers in parentheses are the absolute values of the estimated t-statistics, based on the White het-eroscedasticity-consistent standard errors. ‘**’, ‘*’ or ‘(*)’ show that the estimated parameter is signifi-cantly different from zero on the 1, 5, or 10 percent level, respectively. SER is the standard error of theregression, and J.-B. the value of the Jarque-Bera-test on normality of the residuals.

– 44 –

Table 2a: Local Expenditure, Revenue, Deficit, and Debt per Capita, 1990(Model in Absolute Values, 132 Observations)

Dependent VariableLocal PublicExpenditure

Local PublicRevenue

Local PublicDeficit

Local PublicDebt

constant 2966.269**(1.39)

2811.752**(1.51)

154.517(0.14)

-1341.818(0.09)

average taxable income 0.108*(2.53)

0.091**(2.52)

0.017(0.85)

0.592(*)(1.65)

unemployment rate -125.353(0.31)

-162.611(0.45)

37.258(0.34)

3400.247(1.22)

population in thousands 7.160**(4.09)

5.662**(3.66)

1.499**(2.72)

66.197**(4.91)

share of youngpopulation

-180.442**(4.47)

-175.022**(4.32)

-5.420(0.33)

-217.275(0.71)

share of oldpopulation

69.115*(2.49)

49.581(1.63)

19.534(1.43)

495.482*(2.47)

share of ownrevenue

37.546*(2.21)

41.616**(2.80)

-4.070(0.46)

141.108(1.10)

dummy of referenda on budgetdeficits

-643.742**(3.29)

-625.400**(3.56)

-18.342(-0.22)

-4346.271**(3.27)

fiscal constraints -72.518(0.99)

-11.774(0.17)

-60.744*(2.04)

-7.787(0.01)

agenda settingpower

105.444(1.15)

113.288(1.22)

-7.844(-0.21)

30.116(0.05)

number of parties in the execu-tive

-16.866(0.17)

-40.366(0.405)

23.499(0.65)

-631.895(0.88)

share of leftist parties in the par-liament

-19.069**(3.49)

-17.825**(3.34)

-1.245(0.57)

-52.076(1.14)

dummy for French and Italianlanguage

352.514(1.09)

209.384(0.75)

143.231(1.36)

2854.594(1.21)

dummy for canton Zug 264.947(0.93)

370.481(1.25)

-105.534(0.93)

-7507.046**(3.28)

2R 0.470 0.441 0.031 0.294

SER 899.036 862.586 385.022 6553.912

Chow-Test ( F ) 1.255 1.303 0.864 1.035

J.-B. 1.768 30.571** 0.324 27.905**

The numbers in parentheses are the absolute values of the estimated t-statistics, based on the White heteroscedasticity-consistent standard errors. ‘**’, ‘*’ or ‘(*)’ show that the estimated parameter is significantly different from zero on the1, 5, or 10 percent level, respectively. SER is the standard error of the regression, and J.-B. the value of the Jarque-Bera-test on normality of the residuals.

– 45 –

Table 3: Local Expenditure, Revenue and Debt per Capita, 1990(Model for Direct Democracies in Logarithms,84 Observations)

Dependent VariableNet Local Public

ExpenditureNet Local

Public RevenueLocal Public Debt

constant 5.411**(4.75)

5.617**(2.36)

6.038*(2.63)

log of average taxable income 0.201(1.05)

0.254(1.18)

-0.241(0.58))

unemployment rate -0.009(0.07)

-0.023(0.22)

0.179(1.12)

log of population 0.213(1.06)

0.262(1.18)

-0.244(0.10)

share of youngpopulation

-0.038*(2.44)

-0.039*(2.55)

0.039(*)(1.72)

share of oldpopulation

0.021(*)(1.85)

0.017(1.56)

0.052**(2.79)

share of ownrevenue

0.025**(3.45)

0.021**(3.10)

-0.036**(2.81)

fiscal constraints -0.012(0.44)

0.011(0.46)

0.000(0.00)

agenda settingpower

0.006(0.21)

0.006(0.77)

-0.023(0.46)

number of parties in the execu-tive

0.025(0.84)

0.023(0.77)

-0.058(1.10)

share of leftist parties in theparliament

-0.005**(3.39)

-0.005**(2.93)

-0.004)(1.34)

share of French or Italianspeaking population

0.082(0.78)

0.052(0.61)

0.232(1.24)

2R 0.451 0.428 0.251

SER 0.238 0.226 0.443

J.-B. 2.379 0.288 0.859

The numbers in parentheses are the absolute values of the estimated t-statistics, based on the White het-eroscedasticity-consistent standard errors. ‘**’, ‘*’ or ‘(*)’ show that the estimated parameter is signifi-cantly different from zero on the 1, 5, or 10 percent level, respectively. SER is the standard error of theregression, and J.-B. the value of the Jarque-Bera-test on normality of the residuals.

– 47 –

Appendix 1: Data Sources

Cantonal Data

expenditure

Source: EIDGENÖSSISCHE FINANZVERWALTUNG (FEDERAL FINANCE ADMINISTRATION),Öffentliche Finanzen der Schweiz, Table D.2, Bern, various years.

revenue

Source: EIDGENÖSSISCHE FINANZVERWALTUNG (FEDERAL FINANCE ADMINISTRATION),Öffentliche Finanzen der Schweiz, Table D.3, Bern, various years.

debt

Source: EIDGENÖSSISCHE FINANZVERWALTUNG (FEDERAL FINANCE ADMINISTRATION),Öffentliche Finanzen der Schweiz, Table D.9, Bern, various years and per-sonal correspondence with the FEDERAL FINANCE ADMINISTRATION.

matching grants

federal lump-sum grants

Source: EIDGENÖSSISCHE FINANZVERWALTUNG (FEDERAL FINANCE ADMINISTRATION),Öffentliche Finanzen der Schweiz, Table D.4.5, Bern, various years.

population;

population density;

share of people older than 65 years;

share of young people younger than 20 years;

share of urban population;

Source: BUNDESAMT FÜR STATISTIK (FEDERAL STATISTICAL OFFICE), Informations-dienst, Sektion Bevölkerungsentwicklung, Neuchâtel, personal correspon-dence with Ursula Wegmüller.

cantonal GDP;

Source: BAK BASEL, personal correspondence.

national GDP;

Source: BUNDESAMT FÜR STATISTIK, Statistisches Jahrbuch der Schweiz, variousyears, Table T4.4, NZZ, Zurich.

unemployment rate;

Source: SECO (STATE SECRETARIAT FOR ECONOMIC AFFAIRS), Bern, personal corres-pondence.

fraction of parliament seats held by left-wing parties;

number of parties in the executive;

Source: H. HIRTER ET AL., Année politique suisse/ Schweizerische Politik, Bern, vari-ous years.

fiscal referendum;

– 48 –

signature requirement for the statutory initiative;

Source: A. TRECHSEL and U. SERDÜLT (1999), Kaleidoskop Volksrechte: Die Institu-tionen der direkten Demokratie in den schweizerischen Kantonen 1970 –1996, Helbing and Lichtenhahn, Basel 1999, pp. 39, pp. 81.

statutory fiscal restraints;

Source: STAUFFER, TH.P. (2001), Instrumente des Haushaltsausgleichs: ÖkonomischeAnalyse und rechtliche Umsetzung, Ph.D. Thesis, University of St. Gallen2001, pp. 72.

Local Data

cantonal expenditure, revenue, debt and own revenue;

Source: STATISTIK DER SCHWEIZER STÄDTE, Statistisches Jahrbuch des SchweizerStädteverbandes 1992, Zurich and Bern 1992, pp. 58f.

population;

share of people older than 65 years;

share of young people younger than 20 years;

Source: STATISTIK DER SCHWEIZER STÄDTE, Statistisches Jahrbuch des SchweizerStädteverbandes 1992, Zurich and Bern 1992, pp. 10f.

average taxable income;

Source: EIDGENÖSSISCHE STEUERVERWALTUNG (FEDERAL TAX OFFICE), personal cor-respondence.

unemployment rate;

Source: STATISTIK DER SCHWEIZER STÄDTE, Statistisches Jahrbuch des SchweizerStädteverbandes 1991, Zurich and Bern 1991, pp. 20f.

fraction of parliament seats held by left-wing parties;

number of parties in the executive;

Source: STATISTIK DER SCHWEIZER STÄDTE, Statistisches Jahrbuch des SchweizerStädteverbandes 1990, Zurich and Bern 1990, pp. 62f.

dummy for referenda on budget deficits;

fiscal constraints;

agenda setting power;

Source: OWN SURVEY OF THE SWISS MUNICIPALITIES.

– 49 –

Appendix 2: On the Estimation Procedure

With panel data as they are employed for the cantonal model, a fixed cross section effectsmodel is typically tested against the simple pooled model and then against a random effectsmodel. We allowed for fixed effects in the time domain by using time dummies, but theynever proved to be significant. Thus, we excluded them from the estimations presented below.In the cross-section domain, it does not make sense to include fixed effects (besides thedummy variables for the two cantons Basel-City and Geneva), because the particularly inter-esting political variables on the fiscal referendum and on formal fiscal constraints vary onlyslightly or do in many cantons not vary at all over time. In the period between 1986 and 1997,the canton of Berne abolished the mandatory fiscal referendum in 1995, while the canton ofValais adopted it in 1994. Similar examples could be found with respect to formal fiscal re-straints. Thus, fixed effects might simply mask the impact of the institutional variables andrender them insignificant. Even if they remained statistically significant, the resulting esti-mates would capture the impact these institutions have on fiscal policies by exploiting thetime variation only. The result would be a measure of the influence of the cantons which havechanged their institutional framework, with respect to the mandatory fiscal referendum Berneand Valais only. Thus, given the limited time variation in these political variables, the fixedand random effects models do not seem to be appropriate for our investigation.

At least for the expenditure, revenue and deficit equations, endogeneity of the explanatoryvariables does not seem to be a problem in our model. This is especially true for the institu-tional variables because they only changed slightly during the time period covered by our data.It should also hold for the economic variables, as on the cantonal level public revenue and ex-penditure have hardly any influence on unemployment or average per capita income of thiscanton in the same year. This would be different if we included a tax rate as explanatory vari-able, as is often done when demand functions for public expenditure are estimated, as in thebudgeting process expected revenue and expenditure as well as the tax rates are simultane-ously determined. However, as it would hardly be possible to estimate the simultaneous rela-tions between these variables because of missing instruments we estimated (equations of the)reduced form of our system and, therefore, do not include a tax rate as an explanatory vari-able.

The reduced form (of the pooled system) can consistently be estimated with OLS. However,the residuals of the equations are (highly) autocorrelated, which has no impact on the consis-tency of the estimated parameters, but renders the OLS-estimates of the standard errors incon-sistently. Thus, using a GMM procedure we correct the standard errors to take autocorrelationas well as heteroscedasticity into account.42

There should also be no endogeneity problem for the equation of public debt with respect tothe structural variables, but there might well be such a problem with respect to the economicvariables. Public debt is the sum of earlier deficits which – with some time delay – might havehad an impact on the economic development of a canton. However, because public debt is ac-

42. See for this Greene (1998), p. 408.

– 50 –

cumulated over many years, the usual procedure to use an instrumental variable estimator withlagged variables as instruments cannot solve this problem. Moreover, there are hardly any in-struments available to sufficiently address the endogeneity question. Thus, despite of the pos-sible endogeneity problem we use the same estimation procedure for the debt as for the otherequations.

With respect to the data for the local communities, with the exception of the debt equation wealso do not have a simultaneity problem, but again there are no instruments available to copewith this problem. Thus, we also estimate the equations by OLS. However, to take account ofthe rather different sizes of the local communities we used White-corrected standard errors forthe test statistics.

– 51 –

Appendix 3: Tables Summarising the Empirical Studies on the Impact of Direct Legislation

Table A1: Empirical Studies on the Impact of Direct Legislation on Economic Policy in Switzerland

Economic Variables Authors Sample Time Period Parameter Estimates for the Referendum

Public Expenditures SCHNEIDER and POMMEREHNE

(1983)110 Cities 1968 – 1972 Expenditure growth is 3 percentage points lower in

direct democracy

Public Expenditures FELD and KIRCHGÄSSNER (1999) 131 Cities 1990 Expenditure per capita is 14 % lower

Share of Revenue fromTaxes and User Charges

FELD and KIRCHGÄSSNER (1999) 131 Cities 1990 Share of revenue from taxes and user charges is 5%higher

Median Tax Rate FELD and KIRCHGÄSSNER (1999) 131 Cities 1990 Median tax rate is 14 % higher

Public Debt FELD and KIRCHGÄSSNER (1999) 131 Cities 1990 Public debt per capita is 45 % (10,100 SFr) lower

Public Debt FELD and KIRCHGÄSSNER (2001) 134 Cities 1990 Public debt per capita is 23 % (5,200 SFr) lower

Public Expenditures FELD and MATSUSAKA (2000) 26 Cantons 1986 – 1997 Expenditure per capita is 17 % (340 SFr) lower

Costs of Garbage Collec-tion

POMMEREHNE (1983) 103 Cities 1970 Costs for garbage collection are 20 % higher in rep-resentative democracies

Tax Evasion POMMEREHNE and WECK-HANNEMANN (1996)

25 Cantons 1965, 19701978

Tax evasion is SFr 1,500 lower in direct democracy

Gross Domestic Product FELD and SAVIOZ (1997) 26 Cantons 1990 GDP 15 % higher

Gross Domestic Product FELD and SAVIOZ (1997) 26 Cantons 1984 – 1993 GDP 5.4 % higher

Gross Domestic Product FREITAG and VATTER (2000) 26 Cantons 1983 – 1997 GDP per capita higher, GDP growth 0.2 % higher

– 52 –

Table A2: Empirical Studies on the Impact of Direct Legislation on Economic Policy in the U.S.

Economic Variables Authors Sample Time Period Parameter Estimates

Public Expenditures ZAX (1989) 50 States1305 Cities

1980 265 U.S.-$ higher per capita (States) and 45 U.S.-$higher per capita (cities) with an initiative

Public Expenditures FARNHAM (1990) 735 Cities 1981/82 mixed results

Education Spending SANTERRE (1989, 1993) 90 Cities 1980 3 to 5 % higher with a budget referendum

Public Expenditures MATSUSAKA (1995) 49 States 1960 – 1990 55 - 110 $ lower per capita and year with an initia-tive (on average about 4 %)

Public Expenditures andRevenue

MATSUSAKA (2000) 48 States 1902, 1913,1932, 1942

11 % higher expenditure per capita and 14 % higherrevenue per capita with an initiative

Revenue and ExpenditureStructure

MATSUSAKA (1995) 49 States 1960 – 1990 Relatively more user charges and less taxes with aninitiative, relatively more local than state spending

Public Debt MCEACHERN (1978) 50 States 1974 no significant differences

Public Debt KIEWIET and SZAKALY(1996) 49 States 1961 – 1990 33 % lower guaranteed debt per capita with a refer-endum on new bonds

GDP Growth BLOMBERG and HESS (2000) 48 States 1969 – 1986 3 percentage points higher convergence of GDP percapita