Direct Democracy and Local Public Finances Under Cooperative Federalism

57 Pages Posted: 27 Jun 2013

See all articles by Zareh Asatryan

Zareh Asatryan

ZEW – Leibniz Centre for European Economic Research

Thushyanthan Baskaran

University of Goettingen (Göttingen)

Theocharis Grigoriadis

Free University of Berlin (FUB) - Department of Business and Economics

Friedrich Heinemann

ZEW – Leibniz Centre for European Economic Research; University of Heidelberg - Alfred Weber Institute for Economics

Multiple version iconThere are 2 versions of this paper

Date Written: 2013

Abstract

This paper exploits the introduction of the right of referenda at the local level in the German state of Bavaria in 1995 to study the fiscal effects of direct democracy. In the first part of the paper, we establish the relationship between referenda activity and fiscal performance by using a new dataset containing information on all 2500 voter initiatives between 1995 to 2011. This selection on observables approach, however, suffers from obvious endogeneity problems in this application. The main part of the paper exploits population dependent discontinuities in the signature and quorum requirements of referenda to implement a regression discontinuity design (RDD). To safeguard against co-treatments that might affect fiscal outcomes simultaneously at the same thresholds, we validate our results by extending the RDD approach to a difference-in-discontinuity (DiD) design. By studying direct legislation in an archetypical cooperative federation as Germany, our paper extends the literature to a novel institutional setting. The results indicate that in our setting – and in contrast to most of the evidence from Switzerland and the US – direct democracy causes an expansion of local government budgets.

Keywords: direct democracy, fiscal policy, regression discontinuity, Bavaria

JEL Classification: D72, D78, H70

Suggested Citation

Asatryan, Zareh and Baskaran, Thushyanthan and Grigoriadis, Theocharis and Heinemann, Friedrich, Direct Democracy and Local Public Finances Under Cooperative Federalism (2013). ZEW - Centre for European Economic Research Discussion Paper No. 13-038, Available at SSRN: https://ssrn.com/abstract=2282492 or http://dx.doi.org/10.2139/ssrn.2282492

Zareh Asatryan

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Thushyanthan Baskaran

University of Goettingen (Göttingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

Theocharis Grigoriadis

Free University of Berlin (FUB) - Department of Business and Economics ( email )

Boltzmannstrasse 20
D-14195 Berlin, 14195
Germany

Friedrich Heinemann (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

HOME PAGE: http://www.zew.de

University of Heidelberg - Alfred Weber Institute for Economics ( email )

Grabengasse 14
Heidelberg, D-69117
Germany

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