Abstract
In this paper, I investigate whether changes in the availability of direct democratic institutions in local jurisdictions affect the decentralization of expenditures. Using a difference-in-differences estimation on a panel of 406 Swiss municipalities, I find a statistically significant reduction in decentralization when local jurisdictions introduce mandatory fiscal referenda. To rationalize this result, I propose a model of partial decentralization in which policies are mainly influenced by politicians’ electoral incentives. As direct democracy has positive effects on citizens’ awareness of governments’ behavior, in equilibrium, expenditures will be higher at the level of government at which citizens have the least control over government actions.
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Notes
For instance, Gerber (1996), Feld and Matsusaka (2003) and Matsusaka (1995) provide early evidence of the effect of direct democracy on US and Swiss states’ public policies. Similar results have been highlighted in recent studies on Swedish (Hinnerich and Pettersson-Lidbom 2014) and German local jurisdictions (Arnold et al. 2016; Asatryan 2016; Asatryan et al. 2017; Hessami 2018).
Schnellenbach et al. (2010) provide an alternative model that focuses on the relationship between direct democracy and task assignment.
Notably, neither Feld et al. (2008) nor Funk and Gathmann (2011) account for variation in direct democratic institutions at the local level. In a companion paper, Galletta and Jametti (2015) show that vertical interactions between different decision-making processes affect local public spending in Switzerland. They find that direct democracy at the state level is correlated with higher levels of local government expenditure. However, this positive effect is lower when the local government is able to pass its own legislation.
For instance, the presence of more information might reduce their chances of making untruthful (and positively biased) statements about their performance in office when they face reelection (Davis and Ferrantino 1996).
These predictions are also consistent with alternative stories. For instance, Galletta and Jametti (2015) suggest that under partial decentralization, the heterogeneous presence of direct democratic institutions across different levels of government might encourage a shift in rent extraction from one level to the other. The proposed model in the current article abstracts from rent seeking and instead focuses on the role of electoral incentives. Therefore, it provides a theoretical argument suggesting that direct democratic institutions would affect expenditure allocations in a federation even in countries with few rent-seeking opportunities.
Given that citizens are homogeneous, the population is normalized to one.
In 2004, citizens approved the “Neugestaltung des Finanzausgleichs und der Aufgabenteilung” which entered into force in 2006.
For instance, some school buildings are managed by either municipal or cantonal authorities and teachers are selected and/or paid by either municipal or cantonal governments.
In many small municipalities, the legislature is the communal assembly in which decisions are taken directly by citizens. In other municipalities, the communal assembly coexists with a municipal council.
According to cantonal laws, municipalities might extend limited autonomy to decide reforms to the available direct democratic institutions. Indeed, Micotti and Bützer (2003) note that municipalities in non-German-speaking regions are mostly constrained to use those instruments dictated by the cantons.
Zentrum für Demokratie Aarau (ZDA)—https://www.zdaarau.ch/en/.
These are official (but unpublished) data on public expenditure taken from a survey administered by the Swiss Ministry of Finance in 2009. The survey asked a large sample of municipalities to fill in a form with detailed information on their balances from 1990 to 2009 using an updated version of the “Chart of Accounts and Functional Classification.” This sample of municipalities is not representative of the mean Swiss municipality, as it is unbalanced toward large municipalities from German-speaking cantons.
The level of significance of the main coefficient is stable, or higher, when I use standard errors clustered at the municipal or cantonal level compared to the reported ones.
Galiani et al. (2005) conducted a similar approach to assess the degree of exogeneity of the reform. They study the effects of water privatization in local jurisdictions in Argentina on child mortality.
Ideally, I would have conducted a more in-depth study of the long-term effect. However, for most of the treated municipalities, there is limited information on fiscal data except from when the reform took place.
This robustness check also helps compensate for possible mistakes in the reported information on municipal public expenditure in the survey conducted by the Swiss Ministry of Finance.
Studentized residuals are corrected for their standard errors. They can be described as the t statistic, which would have a dummy variable denoting whether that observation would be included in the regression. Thus, by using 3 as a threshold, I implicitly exclude observations for which the dummy is significant at the 1% level (Belsley et al. 1980).
Table 9 displays detailed results.
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Acknowledgements
I wish to thank David Agrawal, Katherine Cuff, Patricia Funk, Vincenzo Galasso, Mario Jametti, Marcelin Joanis, Michael Devereux, Raphaël Parchet and Francesco Trebbi for their insightful comments and Marco Tarchini for his excellent assistantship. I have also benefited from comments from participants at the Sinergia Workshop (Lausanne), IIPF (Lugano), CPEG (Ottawa), YSEM (Zürich), EPCS (Groningen) and a seminar at the University of Barcelona. Financial support from the Swiss National Science Foundation (Grants ProDoc-130443, Sinergia-130648/147668 and Early Postdoc.Mobility-158603) is gratefully acknowledged.
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I wish to thank David Agrawal, Katherine Cuff, Patricia Funk, Vincenzo Galasso, Mario Jametti, Marcelin Joanis, Michael Devereux, Raphaël Parchet and Francesco Trebbi for their insightful comments and Marco Tarchini for his excellent assistantship. I have also benefited from comments from participants at the Sinergia Workshop (Lausanne), IIPF (Lugano), CPEG (Ottawa), YSEM (Zürich), EPCS (Groningen) and a seminar at the University of Barcelona. Financial support from the Swiss National Science Foundation (Grants ProDoc-130443, Sinergia-130648/147668 and Early Postdoc.Mobility-158603 ) is gratefully acknowledged.
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Galletta, S. Direct democracy, partial decentralization and voter information: evidence from Swiss municipalities. Int Tax Public Finance 27, 1174–1197 (2020). https://doi.org/10.1007/s10797-020-09599-1
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DOI: https://doi.org/10.1007/s10797-020-09599-1