Recently, a wide and empirically backed consensus has emerged arguing that direct democratic control over government’s spending decisions through initiatives and referendums constrains government size. This paper extends the discussion to German direct democracy reforms of the mid-1990s, which granted voters rights to launch initiatives on local issues, but neither the right nor the responsibility of voting on the implied costs of these initiatives. An analysis of around 2300 voter initiatives in the population of around 13,000 German municipalities from 2002 to 2009 demonstrates that in this sample—and in contrast to most of the Swiss and US evidence—direct democracy causes an expansion of local government size on average by around 8 % in annual per capita expenditure and revenue per initiative (on economic projects). This quite substantial increase in government size is financed by an increase in local taxes.
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See Matsusaka (2005) for an introduction.
Among others (Zax (1989), Farnham (1990), Matsusaka (1995), Camobreco (1998), Matsusaka (2000), Bails and Tieslau (2000), Besley and Case (2003), Blomberg et al. (2004), Matsusaka (2004), Marschall and Ruhil (2005), Primo (2010), Salvino et al. (2012) for the USA; Pommerehne (1978), Feld and Kirchgässner (2001), Feld and Matsusaka (2003), Bodmer (2004), Funk and Gathmann (2011) for Switzerland; and Hinnerich and Pettersson-Lidbom (2014) for Sweden.
There are two recent exceptions. Firstly, Blume et al. (2011) compare local government expenditures in the state of Baden-Württemberg to that of the neighboring state of Bayern exploiting the fact that direct democracy was introduced at different time points in the two states. The study, however, relies on small samples, as the local-level fiscal data are aggregated to state level. Secondly, Asatryan et al. (forthcoming) and Asatryan et al. (2014) address some of the empirical concerns by presenting quasi-experimental evidence on, respectively, spending- and taxation-related effects of initiatives. However, the papers concentrate only on one German state, Bayern. All three studies find that in their given samples, direct democracy expands local government size.
Except for a mandatory referendum for territorial changes.
The only exception is the state of Baden-Württemberg, where the right of the initiative was introduced to municipal law in 1956.
To avoid confusion, throughout the study I will use the German names of the Länder (the states) rather than their English translations.
Including Brandenburg, Mecklenburg-Vorpommern, Sachsen, Sachsen-Anhalt and Thüringen in 1990–1993, and Berlin later in 2005.
Including Bayern, Bremen, Hamburg, Hessen, Niedersachsen, Nordrhein-Westfalen, Rheinland-Pfalz and Saarland in 1993–1998, Schleswig-Holstein earlier in 1990, and Baden-Württemberg, as noted, in 1956.
Around 900,000 signatures (10 % threshold) were to be collected in 2 weeks time.
Low signature and quorum thresholds, unlimited time for signature collection, absence of a cost recovery proposal requirement, relatively broad areas where initiatives are allowed, etc.
With higher quorum thresholds, a few weeks of time for signature collection, cost recovery proposal requirement, wide restrictions on topics of initiatives, etc.
I exclude these from the sample because initiatives are implemented either on city (same as state) or city-district levels, both being incomparable to municipalities.
The property tax may additionally have a different rate on agricultural land.
Initiative is a stronger measure, since, as defined above, it captures only those petitions that passed the legislative process and were put to vote. I nevertheless run regression on both variables, since a failed petition (one which did not reach the polls) may still be relevant through a signal (or a threat) to politicians to implement the required policy (and thus eliminating the need for an initiative).
Counties are a unit of organization one step higher than the towns and are equivalent to the European NUTS3 classification. They are defined either on the level of individual cities (“Kreisfreie Stadt”) or, in rural areas, on the level of counties including several towns (“Landkreis”).
The literature deals with these issues in different ways. Most within-country studies directly compare sub-national units with and without direct democratic institutions and control for time-invariant factors by fixed effects. Cross-country studies have a similar empirical strategy. These can be questioned on the grounds of institutions being endogenous. Recent studies have applied arguably more credible identification techniques such as the use of natural experiments by Hinnerich and Pettersson-Lidbom (2014) and Asatryan et al. (forthcoming), respectively, in Sweden and Germany. In contrast to these, all units in my setting have some institutions of direct democracy, thus I look at the actual use of direct democratic instruments.
More instruments can be constructed by looking at additional details of state-level direct democratic institutions. These include the presence of a list of positive topics in state constitutions, the maximum allowed time to collect signatures, and a quorum threshold on the number of casted eligible votes for the initiatives to be approved. The working paper version of this article presents analysis also with these instruments (Asatryan 2014). It shows that signature requirements are the most important driver of initiatives.
Although some state- and size-dependent differences exist, typically German municipalities are responsible for the provision of important public goods to citizens such as kindergartens, elementary schools, utility and infrastructure facilities, local streets, athletic areas, basic health care
The tax bases are uniformly defined nationwide, but municipalities have complete independence in deciding the tax rate by setting a tax multiplier.
Property tax type-A is applied on agricultural land, which raises less than 1 % of total revenue property; thus, I neglect it in the analysis.
And not data on debt since, although preferred, stock data on local government borrowing for this large sample are not available.
At first sight, the larger effect of economic petitions relative to infrastructure ones may seem somewhat surprising as the infrastructural projects are on average more costly (around 65,000 Euros per petition according to the cost recovery proposal) than the economic projects (less than 40,000 Euros). However, as I argue throughout the paper, it is possible that the direct costs of the initiatives (in any case quite low for both categories as an average town spends around 15 million Euros annually) are outweighed by indirect losses due to, for example, unrealized private sector investments—a discussion to which I come back in the conclusions.
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I am grateful to Thushyanthan Baskaran, Nadja Braun Binder, Benny Geys, Annika Havlik, Friedrich Heinemann, François Laisney, Frank Rehmet, Frank Streif, Johannes Voget for valuable comments, as well as Amadeo Dal Borgo for excellent research assistance. I also thank the editor Ron Davies and two anonymous referees for excellent suggestions.
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Asatryan, Z. The indirect effects of direct democracy: local government size and non-budgetary voter initiatives in Germany. Int Tax Public Finance 23, 580–601 (2016). https://doi.org/10.1007/s10797-015-9380-1
- Direct democracy
- Local public finances