Estimating the E¤ect of Direct Democracy on Policy Outcomes: Preferences Matter!

Previous studies have found large negative e¤ects of direct democracies on government spending. Since they do not control for preference heterogeneity, these estimates su¤er from omitted variable bias. If citizens in areas with stronger direct democracy have lower tastes for government, the restraining e¤ect of institutions is overstated. Exploiting a unique dataset in Switzerland, we demonstrate substantial preference heterogeneity across cantons with di¤erent direct democratic regimes. Conditional on voter preferences, the e¤ect of direct democracy declines by more than 40 percent relative to earlier estimates. However, access to direct democratic instruments still decreases canton expenditures by 8 percent, while raising expenditures at the local level by 20 percent. In the Swiss case, a mandatory budget referendum decentralizes expenditures, but has no e¤ect on the size of canton and local governments combined. Our results speak against a pure median voter model and strengthen the view that political institutions have a strong and persistent in‡uence on policy outcomes. JEL codes: H11, H50, H62, H70