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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