Direct and Representative Democracy When States Learn From Their Neighbours

Voters in democracies can learn from the experience of neighbouring states: about policy in a direct democracy (“policy experimentation”), about the quality of their politicians in a representative democracy (“yardstick competition”). Learning between states creates spillovers from policy choice, and also from constitutional choice. I model these spillovers in a simple principalagent framework, and show that voter welfare may be maximized by a mixture of representative and direct democratic states. Because of this, empirical work examining voter welfare under direct democracy may need to be reinterpreted. Also, I show that the optimal mix of constitutions cannot always be achieved in a constitutional choice equilibrium involving many states.