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Direct democracy and government size: evidence from Spain

Published online by Cambridge University Press:  27 March 2019

Carlos Sanz*
Affiliation:
Banco de España, Research, C/ Alcalá 48, Madrid, 28014 Spain
*
*Corresponding author. Email: carlossanz@bde.es
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Abstract

I study the effects of direct democracy on economic policy in a novel setting. In Spain, national law determines that municipalities follow either direct or representative democracy, depending on their population size. Using a fixed-effect regression discontinuity design, I find that direct democracy leads to a smaller government, reducing public spending by around 8 percent. Revenues decrease by a similar amount and, therefore, there is no effect on budget deficits. These findings can be explained by a model in which direct democracy allows voters to enforce lower special-interest spending. I provide several additional results and discuss alternative mechanisms.

Information

Type
Original Article
Copyright
Copyright © The European Political Science Association 2019
Figure 0

Figure 1. Timeline: each unit represents a year y.

Figure 1

Table 1. Summary Statistics

Figure 2

Figure 2. Histogram of population sizes. An observation is a municipality-year. Bins are 5-inhabitant wide.

Figure 3

Figure 3. Effect of direct democracy on expenditures, revenues, and deficit. I estimate $ {Outcome_{myt}} =\alpha _m + \gamma _y + \sum \nolimits _{j=100-OBW}^{100+OBW} \delta _j {Population_{j, mt}} + u_{myt}$, where Populationj,mt is a dummy that indicates whether municipality m has population size j at term t. In the y-axis, I plot the estimated coefficients ${\hat \delta}_j$, averaged to 4-inhabitant-wide bins. I normalize the coefficients so that the average bin immediately to the right of the threshold takes the value of zero. The lines are linear fits on ${\hat \delta}_j$, fitted separately for observations above and below the threshold. I use the observations within the optimal bandwidth for Log Expendituresmyt, so that all graphs show the same range in the x-axis.

Figure 4

Table 2. Effect of Direct Democracy on Public Finances

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