On Government Centralization and Fiscal Referendums: Lars P. Feld, Christoph A. Schaltegger, Jan Schnellenbach

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European Economic Review 52 (2008) 611–645

www.elsevier.com/locate/eer
On government centralization and fiscal referendums

Lars P. Felda,, Christoph A. Schalteggerb, Jan Schnellenbacha
a
Alfred-Weber-Institut, University of Heidelberg, Grabengasse 14, D-69117 Heidelberg, Germany
b
Swiss Federal Department of Finance, Switzerland
Received 9 March 2005; accepted 14 May 2007
Available online 8 June 2007
Abstract
Several authors have argued that a centralization of fiscal powers in a federation is less likely to
occur if citizens have to approve a change in the assignments of responsibilities by a popular
referendum. This outcome may be due to the fact that logrolling is more difficult under direct than
under representative democracy. It may also be caused by citizens’ fear that a centralization of fiscal
authority facilitates the extraction of rents by the government or the legislature. In this paper, we test
the hypothesis that centralization is less likely under referendum decision-making in the unique
institutional setting of Switzerland. Using a panel of Swiss cantons from 1980 to 1998, the empirical
analysis provides evidence that referendums induce less centralization of fiscal activities.
r 2007 Elsevier B.V. All rights reserved.
JEL classification: H1; H7; D72
Keywords: Centralization; Fiscal federalism; Fiscal referendums
There is a limit to the extent of country which can advantageously be governed, or

even whose government can be conveniently superintended, from a single centre.
John Stuart Mill (1861)
1. Introduction
A number of economists and political scientists have been concerned with the normative
question of an optimally designed federalist constitution. James Madison already emphasized
that a decentralized provision of public services best helps satisfying different needs arising
Corresponding author. Tel.: +49 6421 972666.
E-mail address: lars.feld@awi.uni-heidelberg.de (L.P. Feld).
0014-2921/$ - see front matter r 2007 Elsevier B.V. All rights reserved.
doi:10.1016/j.euroecorev.2007.05.005
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612 L.P. Feld et al. / European Economic Review 52 (2008) 611–645
from local or regional particularities: In Federalist 10, he contended that ‘‘the great and
aggregate interests being referred to the national, the local and in particular to the State
legislatures’’ (Hamilton et al., 1787/88, p. 83). In the fiscal federalism literature, Oates (1972,
p. 11) argues that decentralization is particularly appropriate if residents in different sub-
federal jurisdictions have different tastes for public services. Their uniform provision at the
federal level would leave both worse off, the residents who want more of a public good and
the residents who want less of a public good. Consequently, he proposes his Decentralization
Theorem as a guideline for the distribution of fiscal powers among different tiers of
government: In the absence of inter-jurisdictional externalities and economies of scale in the
provision of public services, decentralization of government activities is preferable.
A large body of literature has followed the normative theory of fiscal federalism by
developing conditions under which centralization of government activities or coordination
among sub-federal governments should be undertaken (for surveys see Oates, 1999, or
Wilson and Wildasin, 2004).1 Inter-regional externalities (cost or benefit spillovers) provide
arguments for coordination activities. Tax competition creates fiscal externalities between
jurisdictions and thereby provides a rationale for centralization. In addition, economies of
scale in the consumption of public services can be exploited by a centralized provision.
With respect to income redistribution, centralization may be useful to circumvent income
segregation between sub-federal jurisdictions. Finally, macroeconomic stabilization can be
provided more effectively at the federal level. However, there are also theoretical
arguments against each of these motivations for centralization. For example, fiscal and
regional externalities may offset each other (Sørensen, 2004), and internalization of
externalities can be achieved through voluntary transfers between jurisdictions (Myers,
1990). Therefore, the normative question to what extent government services and tasks
should be (de-)centralized is still openly debated.
Whether the mechanisms discussed by the normative theory of fiscal federalism actually
serve as a guide for the assignment of jurisdiction to different government levels has only
recently been analyzed. In two empirical studies, Strumpf and Oberholzer-Gee (2002) for
the U.S. states as well as Cerniglia (2003) for a sample of OECD countries present evidence
that preference heterogeneity more likely induces policy decentralization. In a theoretical
analysis, Besley and Coate (2003) argue that centralization processes can only be explained
by referring to arguments from political economics. It is thus surprising that the empirical
literature has seldom considered the political economy of centralization or decentraliza-
tion. Baker (2000) takes a top-down perspective by concentrating on the impact of
authorities’ veto power. According to his results of a cross-section of U.S. states in 1987,
governors in the states use enhanced veto authority to attract local spending
responsibilities to the state level. Vaubel (1996) analyzes the impact of legal and
constitutional restrictions on government centralization for a cross section of about 50
countries in the early 1990s and finds that the independence of the highest courts
significantly reduces centralization. In a convincing study, Panizza (1999) presents evidence
for about 60 countries that a higher level of democracy is associated with less centralized
government activity.2 Garrett and Rodden (2003) corroborate these results for a panel of
1
The literature on the normative theory of fiscal federalism is large and still expanding. A brief summary of the
basic arguments is provided by Feld and Schneider (2001) while the classic articles on fiscal federalism are
collected in Oates (1998).
2
For an earlier study along these lines see Pommerehne and Kirchgässner (1976).
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L.P. Feld et al. / European Economic Review 52 (2008) 611–645 613
47 states and the period 1978–1997. In addition, their results indicate that more open
economies have more fiscal centralization.
In contrast to this branch of the literature, we are concerned in this paper with the
impact of referendums on fiscal centralization. The hypothesis that referendums lead to
less centralization has been recently developed in theoretical analyses, in particular by
Redoano and Scharf (2004), but it has not yet been tested explicitly. While Panizza (1999)
and Garrett and Rodden (2003) are concerned with the impact of democracy on
centralization, their democracy index does not allow to disentangle the impacts of specific
constitutional provisions on policy centralization. Anecdotal evidence, originating for
example from experience with centralization processes in the European Union, however
tentatively suggests that a centralization of powers might be relatively easy to achieve
among consenting representatives, compared to centralization that needs popular approval
in a referendum.3 Without providing systematic evidence, Blankart (2000) argues in a
comparative case study of Germany and Switzerland that their institutional differences, in
particular the extent of direct democracy, explain the different centralization outcomes.
Finally, Matsusaka (2004) provides evidence that U.S. states with popular initiatives have
lower state and higher local spending, indirectly suggesting that direct democracy leads to
decentralization. These studies for the U.S. sub-federal level do neither consider the
referendum nor test (de-) centralization explicitly though.
Thus, our analysis contributes to this literature by providing a direct empirical test of the
impact of referendums on the centralization of government activities. Using panel data for
26 Swiss cantons for the period from 1980 to 1998, we report evidence that fiscal
referendums at the Swiss cantonal level lead to less centralization of cantonal spending and
revenue. We will briefly discuss the theoretical mechanisms that can be held responsible for
different centralization outcomes in constitutional systems with and without referendums
in Section 2. Section 3 gives an outline of some stylized facts on Swiss institutions. In
Section 4 we set up our empirical test of the hypothesis that referendums induce less
centralization. The results are presented in Section 5, and finally, Section 6 concludes.
2. The political economy of (de-)centralization: Theoretical mechanisms
In a recent paper, Besley and Coate (2003) challenge the conventional wisdom of the
normative economics of fiscal federalism: In their framework of benevolent governments
taking different preferences in different jurisdictions into account, a centralized system is
principally capable of allocating different levels of local public goods to different districts.
But unlike a decentralized decision-making process, the centralized provision accompanied
by decentralized administration can internalize cross-border externalities. Therefore,
according to Besley and Coate (2003), the rationale for decentralization must be explained
with recourse to political economy considerations and not solely with preference
heterogeneity. In their model, locally provided public goods are chosen by locally elected
representatives. They therefore have incentives to equate the marginal benefits from the
3
In a referendum on joining the European Monetary Union on September 28, 2000, the Danish people decided
by a majority of 53.1 percent not to become a member of EMU. On May 29, 2005, French voters rejected the
Draft Treaty establishing a European Constitution by a clear margin of 54.7 percent (with a turnout rate of 69.3
percent) in a national referendum. Only three days later, Dutch voters even more unambiguously opted for
rejection of the EU constitution (61.6 percent against, with a turnout rate of 62.8 percent).
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public good within their home region with the marginal costs of public funds. In a
centralized regime, the level of local public goods is decided upon by the federal legislature
consisting of elected representatives from each district. This leads to a common pool
problem of the centralized budget: Each representative fully internalizes the benefit of the
public good provided to his own district, but as financing is shared through general taxes
he internalizes only a fraction of the marginal costs of public funds. Concentration of
benefits and dispersion of costs conjure an overspending problem. Thus, the constitutional
decision for or against centralizing public goods entails a trade-off between the benefits of
internalizing regional externalities and the costs of a common pool problem that can best
be solved by fiscal federalism.4
The argument made by Besley and Coate is primarily directed at giving a rationale for
decentralization that rests on a set of standard political economy assumptions. Their
result, that a centralized regime leads to overspending, is valid even with no extraction of
political rents by representatives being accounted for, because the driving mechanism is the
common pool dilemma on the central level. However, one can also reverse the argument: If
pork-barrel-politics are possible on the central level, then self-interested local representa-
tives have an incentive to centralize fiscal policies in order to channel an oversupply of
local public goods into their regions. This point was already recognized by Riker (1964),
and discussed in detail by Weingast et al. (1981), who conclude that federalism is inherently
unstable and endangered by secular trends towards centralization.5 Brennan and
Buchanan (1980) argue that collusive agreements among sub-federal representatives will
weaken the competitive pressures imposed upon them and increase their leeway to extract
political rents. Well-informed voters who rationally account for these tendencies would
therefore be inclined to oppose a significant transfer of competencies to the central level. In
a democracy with a widespread use of referendums, such political inefficiencies are thus
less likely to occur. Indeed, Feld and Kirchgässner (2001a) and Feld and Matsusaka (2003)
provide evidence for Switzerland that fiscal referendums lead to lower public spending.
Whether this is actually accompanied by less rent extraction is however uncertain
as the fiscal referendum also provides incentives for the higher level representatives to
shift competencies to the lower government levels in order to preserve their ability to
extract rents.
Redoano and Scharf (2004) extend the Besley and Coate model by giving greater
attention to the process of centralization itself. They argue that representative democracy
offers additional instruments that are not available in referendums and emphasize the
importance of strategic delegation. In that paper, spatial utility spillovers from public
goods provide a rationale for centralization between regions, even with their median voters
differing in their preferences for public goods. However, voter heterogeneity requires
strategic delegation to implement centralization: Only if a representative with more
moderate preferences than the local median voter can be delegated to the central level, a
consensus on centralization can be reached, for example by log-rolling mechanisms. In this
4
The analysis by Lockwood (2002) is similar to Besley and Coate’s (2003) model. Persson and Tabellini (1994)
also use a political economy analysis to show the importance of decentralization in restricting government
discretion. See also Alesina and Spolaore (1997), Bolton and Roland (1997), Inman and Rubinfeld (1997), Persson
and Tabellini (2000), and Tommasi and Weinschelbaum (2003).
5
de Figueiredo and Weingast (2005) return to this topic by discussing, albeit in a very abstract theoretical
fashion, the possibilities of implementing self-enforcing federal institutions.
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model, Redoano and Scharf do not allow representatives to extract political rents; their
argument rests only on the interaction of voter heterogeneity and spatial spillovers.6
In contrast, Crémer and Palfrey (1996) are not concerned with the benefits of
centralization in a world of regional externalities. They study whether centralization is
more likely to occur under aggregation of votes at the national (unitary referendum) or the
district levels (sub-federal referendum). They show that centralization is more likely in a
sub-federal referendum procedure because uncertainty about the policy outcome chosen
leads voters to prefer the moderation of extreme policies at the federal level. Lockwood
(2004) studies the assignment of powers under unitary and federal referendums by
considering economies of scale as a benefit and political inefficiencies as a cost of central
provision. Under certain conditions, he shows that both kinds of referendums may be
efficient. Whether a sub-federal referendum more or less likely leads to policy
centralization depends however on the distribution of the benefits of centralization to
the different districts. If the gains are uniformly distributed, both types of referendums are
asymptotically equivalent. The federal referendum is however more sensitive to changes in
the distribution of regional medians away from the uniform distribution than is the unitary
referendum.
In a theoretical companion paper to this empirical study, Feld et al. (2006) show
formally that citizens can be expected to be relatively reluctant to centralize spending
competencies. If they have direct-democratic control mechanisms at their disposal,
centralization occurs less often compared to purely representative regimes. Since we
compare a number of different scenarios in the theoretical study, we need to distinguish
between two mechanisms that are responsible for the result. One pathway of centralization
leads to cooperative centralized public goods provision. In this case, pork-barreling is
possible on the central level. Since we assume that representatives can extract rents from
supplying public goods, voters fear excessive overspending following a collusive transfer of
competencies and use a referendum to veto the centralization process. Another pathway
leads to non-cooperative decision-making on the central level, so that the spending
proposal from each region has a certain probability to be successfully implemented after
prevailing against the competing proposals from the other regions. We show that the
overall, nationwide willingness to centralize is the highest when the probabilities are equal
for all regional spending proposals involved. Achieving this does, on the other hand,
require the use of instruments such as gerrymandering that are typically associated with
representative, rather than direct democracy.7
It would be an ambitious goal to test empirically which of the theoretical mechanisms
sketched here is responsible for reluctant approvals of centralization proposals in
referendums. This would, however, imply that the second step is made before the first: So
far, there are no empirical studies that focus on the differential impact that the details of
the collective decision-making process have on centralization. In other words: The
literature so far offers, to our knowledge, no econometric support for the following
hypothesis.
6
See also Dur and Roelfsema (2005) who qualify the result that centralization may lead to overspending by
showing that, with a sufficiently large portion of the costs of the public good remaining local, underspending can
also result. In contrast, Lorz and Willmann (2005) show that centralization may be inefficiently low under
strategic delegation when voters delegate to representatives who are averse to public spending and prefer
decentralized decisions.
7
See Gilligan and Matsusaka (2006) on gerrymandering.
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Hypothesis:. Centralization of fiscal jurisdiction is less likely if it needs to be approved in a

popular referendum, compared to centralization in a purely representative democracy.
3. Stylized facts about Swiss institutions
Switzerland provides a natural laboratory to test this hypothesis as, first, sub-federal
jurisdictions have strong political and fiscal autonomy, and, second, institutions of direct
democracy are widespread. Key to the empirical analysis is thus some institutional
knowledge of the assignment of (fiscal) powers in Switzerland, and of Swiss direct
democracy as well.
3.1. The assignment of fiscal competencies
The power of the Swiss federal government is very limited. First, federal tasks have to be
explicitly enumerated in the federal constitution. Second, the federal government cannot
easily attract additional powers as the centralization of responsibilities has to be approved
in a referendum requiring a double majority of the Swiss citizens and of the cantonal
electorates. This is well reflected in budgetary figures. In 2001, 32.6 percent of total
(federal, cantonal and local) spending was undertaken by the federal government, 40.7
percent by the cantonal level and 26.6 percent by the local level. There are corresponding
figures for public revenue. The degree of spending and revenue centralization is
accompanied by a respective decision-making power of the different government levels
on spending and revenue policies. For example, there does not exist such a far-reaching tax
sharing agreement between Swiss jurisdictions as in Australia, Austria or Germany.
Cantons and local jurisdictions have strong autonomy to decide on personal and corporate
income taxes such that the cantons and local jurisdictions in Switzerland derive about 50
percent of their revenue from own taxes, mainly from own income and property taxes
(Feld, 2000; Feld and Schneider, 2001). Similarly, cantons decide on their infrastructure
autonomously. Even social welfare programs are autonomously determined by the local
and state levels.
As Figs. 1 and 2 illustrate, there is an additional variation of centralization from the
local to the state level in the different Swiss cantons. For total revenue and spending, it
varies from roughly 50 percent in cantons like Zurich or Schwyz to essentially 100 percent
in the canton of Basle city. The latter is an outlier in that respect, because cantonal and
local spending are not properly separated in the budget laws and the canton consists of
three local jurisdictions only, the city of Basle as well as the communities of Bettingen and
Riehen. The second most centralized canton is the canton of Uri. The degree of
centralization varies even more considerably for different revenue and spending categories.
While the average centralization of direct taxes (with the exception of inheritance taxes)
appears to be relatively homogeneous, average centralization of public spending categories
is considerably more heterogeneous. It ranges from 8 percent to 98 percent in the case of
spending for culture and recreation, but from 51 percent to 100 percent in the case of
education spending (Appendix B, Table B1). As the descriptive statistics in Table B2 in
Appendix B indicate, however, cross-sectional (between) variation of fiscal centralization is
stronger than the variation across time (within variation). Within variation is only one fifth
of between variation according to the standard deviation of the spending and revenue
centralization (logistically transformed). Still, it is non-negligible.
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1.2
Fraction of Cantonal Expenditure from Total
98%
Cantonal and Local Expenditure
1
85% 83%
79% 78%
0.8 76%
73% 70%
69% 67% 67%
65% 63% 63% 63%
60% 60% 60% 59% 58% 58% 59% 61%
0.6 54% 56% 56%
0.4
0.2
0
ZH
BE
LU
R
SZ
L
ZG
FR
SO
BS
BL
SH
AR
AI
SG
R
AG
TG
TI
VD
VS
E
JU
G
G
U
G
O
Fig. 1. Expenditure centralization in Swiss cantons, average between 1980 and 1998.
1.2
Fraction of Cantonal Revenue from Total
98%
1
Cantonal and Local Revenue
85%
82%
79% 78%
0.8 73% 75%
70% 71%
66% 67% 67%
62% 64% 63%
60% 59%
57%
59% 60% 58% 59% 60% 61%
0.6 56%
53%
0.4
0.2
0
ZH BE LU UR SZ OW NW GL ZG FR SO BS BL SH AR AI SG GR AG TG TI VD VS NE GE JU
Fig. 2. Revenue centralization in Swiss cantons, average between 1980 and 1998.
3.2. Institutions of direct democracy
Switzerland’s considerable autonomy at the state and local level is accompanied by an

important variation of institutions of direct democracy (Trechsel and Serdült, 1999; Feld
and Matsusaka, 2003). Most cantons have some form of semi-direct democracy with a
parliamentary system with legislators elected according to a system of proportional party
representation. Only two rural cantons (Appenzell-Innerrhoden (AI) and Glarus (GL))
take political decisions in canton meetings (Landsgemeinde). According to Trechsel and
Serdült (1999), direct legislation in Swiss cantons can be divided into several different
instruments. In order to create a composite index of direct democracy for the Swiss
cantons, Stutzer and Frey (2000) categorized these instruments into four different aspects:
(1) The constitutional initiative, (2) the legislative initiative, (3) the legislative referendum
and (4) the fiscal referendum. The index weights for these different instruments of direct
democracy are given according to the signature requirement to qualify for the ballot. In the
case of the fiscal referendum, the weights additionally comprise the financial threshold for
the spending project that qualifies for the ballot. The easier the use of instruments of direct
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democracy, the more likely policy outcomes will differ compared to a purely representative
democracy (Stutzer and Frey, 2000).
What do these different institutions mean for political outcomes? The constitutional and
the legislative initiative enable voters to put new proposals on the political agenda that
have so far been neglected by the representative system. If the signature requirement is met
within a prescribed time span, it is possible to launch a popular initiative for either a total
or a partial revision of the constitution. The signature requirements, as well as the
maximum time span to collect signatures, vary strongly among the 26 Swiss cantons; for
example, the requirement ranges from 300 signatures for total and partial revision of the
constitution in Canton Uri (UR) to 15,000 signatures for a partial revision and 30,000
signatures for a total revision of the constitution in the canton Bern (BE). As regards the
time span, some cantons have no time constraint for signature collection, while the shortest
time span of 3 months occurs only in the canton Vaud (VD) (Trechsel and Serdült, 1999,
pp. 67 and 71).
The legislative referendum is possible in all Swiss cantons, even though in different
forms (Trechsel and Serdült, 1999, pp. 17). Some cantons use the mandatory referendum,
in which all new laws must be put to popular vote (no signature requirements); others use
the optional referendum for which the signature requirements, as well as the collection
time, vary considerably again. The extreme values are 300 signatures within 90 days
(Canton Uri, UR) and 12,000 signatures in 40 days (Canton Vaud, VD).
In the case of the fiscal referendum, depending on the canton, spending projects that
reach a defined financial threshold qualify for either the mandatory or optional fiscal
referendum. The fiscal referendum in Swiss cantons distinguishes between non-recurring
and recurring spending. Additionally, some cantons entitle not only spending to
imputation on the fiscal referendum but also bonds, taxes, holdings on corporations and
transactions for real estate. Table 1 provides an overview in particular on the fiscal
referendum. There exists no fiscal referendum on the central level, but with the exception
of the canton of Vaud (VD)8 all cantons have a derivative of the fiscal referendum. Of the
remaining 25 cantons, 13 have a mandatory as well as an optional fiscal referendum. In
seven other cantons (BE, BS, BL, AG, TI, VS, GE) only the optional fiscal referendum is
possible, whereas in five cantons (SZ, GL, ZG, AR, NE) budget resolutions have to pass
the mandatory, but not the optional fiscal referendum. In principle, there are threshold
variations for non-recurring expenditures and for recurring expenditures. Five cantons
(FR, AR, VS, NE, JU) determine thresholds as a percentage of last budget’s expenditures.
All others determine a specific nominal amount as the decisive threshold. The number of
signatures required to qualify for ballots and the time span within which the signatures
have to be collected for the optional fiscal referendum is also very diverse among cantons.
It differs from 0.49 percent of signatures from all voters in the canton of Obwalden (OW)
compared to 4.28 percent of signatures in the canton of Jura (JU). The time span for
collecting the signatures varies from 30 days to 90 days among cantons with an optional
fiscal referendum. During the last 35 years, there have been several changes in the adoption
of the fiscal referendum or in the additional institutions shaping it. For example, the
canton of Berne switched from a mandatory to an optional fiscal referendum. Such
changes in the basic adoption of this instrument are however not happening frequently.
Changes in the spending thresholds occur more often.
8
Laws affecting public spending are subject to an optional legislative referendum in the canton of Vaud (VD).
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Table 1
Spending thresholds for fiscal referendums in Swiss cantons
Canton Non-recurring expendituresa Recurring expendituresa Frey-Stutzer Indexb
Optional Mandatory Optional Mandatory
ZHc 2–20 20 0.2–2 2 4

BE 2 – 0.4 – 5
LU 3–25 25 Specific stipulationsd 4.25
UR 0.5 1 0.05 0.1 5
SZ – 0.25 – 0.05 4.38
OW 0.5 1 0.1 0.2 5
NW 0.25 5 0.05 0.5 5
GL – 0.5 – 0.1 4
ZG – 0.5 – 0.05 4
FR 0.25% 1% 0.25% 1% 2
SO 1–2 2 0.1–0.2 0.2 5
BS 1 – 0.2 – 4.25
BL 0.5 – 0.05 – 4.75
SH 0.3–1 0.3 0.05–0.1 0.05 4.5
AR – 5% – 1% 4
AI 0.25 0.5 0.05 0.1 3
SG 3.15 15 0.3–1.5 1.5 3.25
GR 1–5 5 0.3–0.5 0.5 4
AG 3 – 0.3 – 4.5
TG 1 3 0.2 0.6 4.5
TI 0.2 – 0.05 – 2.75
VD – – – – 3
VS 0.75% – 0.25% – 1
NE – 1.5% – 1.5% 1.5
GE 0.125 – 0.06 – 1
JU 0.5% 5% 0.05% 0.5% 2.5
Source: Lutz and Strohmann (1998) and Stutzer and Frey (2000).
a
In 1,000,000 Swiss Francs.
b
The index is constructed by the signature requirement as the number of signatures relative to the number of
voters, by the legal time limit as the days within which the signatures have to be collected and by the financial
threshold as the per capita spending limit allowing for referendum (the values correspond to the year 1992).
c
The identification codes stand for the following cantons: Aargau (AG), Appenzell-Innerrhoden (AI), Appen-
zell-Ausserrhoden (AR), Bern (BE), Basel-Landschaft (BL), Basel-Stadt (BS), Fribourg (FR), Genève (GE),
Glarus (GL), Graubünden (GR), Jura (JU), Luzern (LU), Neuchâtel (NE), Nidwalden (NW), Obwalden (OW),
Schaffhausen (SH), Schwyz (SZ), St.Gallen (SG), Solothurn (SO), Thurgau (TG), Ticino (TI), Uri (UR), Vaud
(VD), Valais (VS), Zug (ZG) and Zürich (ZH).
d
In the case of recurring expenditures the total amount over all concerned budget periods is decisive.
Given this diverse picture, it appears to be no easy task to quantify the extent of direct
legislation in a jurisdiction. In addition, there is a debate as to whether the relevant
measure is the mere existence of direct popular rights via several instruments or the use of
direct legislation by the voters. Rothstein (1996) distinguished between ‘‘rules in form’’ and
‘‘rules in use’’ (p. 146). On the one hand, it is argued that the effective use of direct
democracy causes changes in politics. That is, the way political conflicts are resolved in a
ARTICLE IN PRESS
jurisdiction reflects the specific political culture, which eventually forces politicians to
become active in several policy fields (Freitag and Vatter, 2000).9 On the other hand, it is
argued that the mere possibility of making use of referendums forces politicians to adapt
their behavior and decisions. It is not necessary that these instruments actually are used,
but rather that they could potentially be used. The same can be said for voter initiatives. If
a powerful interest group threatens to propose a voter initiative, a government proposal is
frequently changed according to the group’s claims so as to circumvent the initiative. Thus,
governments must take direct popular rights into account when proposing a certain law or
spending project due to their mere existence.
In the following, we focus on the fiscal referendum, though the signature requirement for
the legislative initiative is used as a control variable. We first use a dummy variable taking
on the value of 1 if a mandatory fiscal referendum is in place in a canton (and zero
otherwise) and the spending threshold above which a spending proposal qualifies for the
mandatory fiscal referendum. Second, we also use the Frey-Stutzer Index of direct
democracy calculated for the sub-category of fiscal referendums for robustness analyses.
4. The empirical model
In order to test our hypothesis that fiscal referendums are associated with a lower degree
of government centralization, we use a linear model with the fraction of cantonal
expenditure from total cantonal and local expenditure as a dependent variable. In
additional models, the fraction of cantonal revenue from total cantonal and local revenue
serves as another dependent variable. Moreover, the centralization of the different
components of spending and revenue to the cantonal level is basically explained by the
same model. The centralization we analyze in our empirical model is a centralization from
the local to the cantonal level. The model can be written as follows:
ES it ¼ a1 þ b1 Rit þ g1 T it þ d1 X it þ 1it , (1)
RS it ¼ a2 þ b2 Rit þ g2 T it þ d2 X it þ 2it (2)

with (see Appendix A for an exact definition of all variables):
ESit ¼ share of real cantonal spending (structure) in percent of total state and local
spending;
RSit ¼ share of real cantonal revenue (structure) in percent of total state and local
revenue;
Rit ¼ vector of direct democracy variables at the cantonal level including: Dummy
variable ¼ 1, if a canton has a mandatory fiscal referendum (zero otherwise),
spending threshold for fiscal referendums (per capita), signature requirement
(per capita) for the legislative initiative;
Tit ¼ vector of fiscal federalism variables including: Income homogeneity: Ratio of
real taxable income of median to average taxpayers, tax competition, i.e.
weighted average of the tax burdens of all other cantons for the highest income
class (weight: The inverse of geographical distance), economies of scale,
captured by population size, the share of urban population, and fragmentation
(number of communes), federal lump-sum grants;
9
Trechsel (2000) gives a survey on all votes in Swiss cantons and on the federal level from 1970 to 1996.
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Xit ¼ vector of economic, demographic and political control variables including:

Real cantonal income per capita, language differences measured by the share of
the German speaking population, ideology, i.e. an index ranging from 1 (right
wing) to 5 (left-wing) executives, coalition size, measured by the number of
parties in the cantonal cabinets, the number of cantonal ministers in the
cabinet;
a, b, g, d ¼ vector valued coefficients to be estimated and
e¼ error term.
In addition, time fixed effects are included in all equations. We estimate the model using
annual data for the period 1980–1998 deflated to the year 1980. The subscript i ¼ 1, y, 26
indicates cantons and t ¼ 1980, y, 1998 indexes years (see summary statistics in Appendix B).
There are three variables of direct democracy. To consider the institutional impact of
fiscal referendums on government centralization we use a dummy variable of mandatory
cantonal fiscal referendums Rit. According to our hypothesis, this variable should exhibit a
negative sign. In addition the spending thresholds for mandatory fiscal referendums (per
capita) are included in the model. As mentioned in Section 3, a mandatory (compulsory)
fiscal referendum must be held if a spending project exceeds a pre-specified amount. Only if
the project is bigger than such a threshold, the fiscal referendum can be binding. The higher
that amount, the less restrictive are fiscal referendums. A positive sign is thus expected for
this variable. Moreover, the signature requirements for legislative initiatives (per capita) are
included. The higher that signature requirement the more difficult it is to bring an initiative
to the ballots. The role of the initiative in the question of fiscal centralization is less clear-
cut than that of the referendum. While the latter is a veto instrument, the initiative could
be used to change the status quo. With respect to fiscal centralization, this possibility
implies that initiatives could be started to centralize or to decentralize policies depending
on the status quo. The signature requirement could thus have a positive or a negative sign.
If it turns out to be positive, the initiative restricts fiscal centralization. The initiative and
the fiscal referendum are then substitutes. If it has a negative sign, the initiative is used to
enhance the responsibilities of the cantonal level. The initiative and the fiscal referendum
are then complements.
In addition, the expenditure (revenue) structure is a function of fiscal federalism,
measured by the vector Tit. All in all, six variables could be subsumed under this heading.
According to Besley and Coate (2003) and Redoano and Scharf (2004), centralization
depends on preference heterogeneity at the local level, but it could also result from tax
competition or economies of scale in the provision of government services (Lockwood
2004). We capture homogeneity in a canton by solely relying on income differences.
Although cross-country studies (Alesina et al., 1999) provide substantial evidence that
heterogeneity goes more through ethnic and linguistic lines than through income lines, this
does not necessarily hold for Switzerland. The intense tax competition between Swiss
cantons induces a sorting of taxpayers that goes mainly along income lines (Feld, 2000).
Still, the linguistic or religious differences between Swiss cantons as well as differences
between urban cantons and the countryside are also controlled for in the proposed
econometric model or in the robustness analyses. The spread of personal income is
measured by the ratio of real taxable income of the median taxpayer to that of the average
taxpayer. The stronger the income homogeneity of a canton, the more reasonable it is to
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centralize government policies because of low preference costs. The closer the ideal points
of the median voters in different local jurisdictions, the more easily they can agree upon a
uniform centralized provision of a public good.
A competing hypothesis with respect to that variable can be found in the literature on
fiscal federalism according to which decentralized income redistribution is not possible due
to income stratification (Feld and Schneider, 2001). The more uneven income is distributed
in a jurisdiction, the more citizens may want to centralize income redistribution activities.
The higher the ratio of median to mean income, the more even the income distribution in a
canton. Following the normative theory of fiscal federalism, higher income differences are
supposed to increase the political pressure for centralization in particular with respect to
spending and revenue components which are strongly aimed at redistributing income, like
e.g. (progressive) personal income taxes or welfare spending. The homogeneity variable
thus helps to identify the relative importance of both hypotheses. It is supposed to have a
negative sign, if the traditional public finance hypothesis on the impossibility of
decentralized redistribution holds. If the political economy argument holds, the
homogeneity variable should have a positive sign.
Moreover, cantonal governments take fiscal policies of their neighbors into account
when making own decisions. This mimicking behavior of incumbents in a federalist system
is either the result of a tax competition game between the different jurisdictions, and thus
their response to differential mobility of production factors (Wilson and Wildasin, 2004),
or a response of electoral voting behavior since voters make inter-jurisdictional
comparisons when taking own decisions. Consequently, incumbents are engaged in
yardstick competition (Besley and Case, 1995). The extent of tax or yardstick competition is
taken into consideration by a weighted average of the tax burdens of all other cantons for
the highest income class. As weight, the inverse of geographical distance is used. Three
other control variables for the extent of fiscal federalism are included. Population, ratio of
urban population and fragmentation (number of communes) capture (the lack of)
economies of scale in consumption of publicly provided goods. Following the argument
by Brennan and Buchanan (1980), lump-sum grants from the central level constitute an
important resource for cantonal and local governments and therefore change the incentive
structure of fiscal federalism.
In addition to variables of fiscal federalism, we include a vector of economic,
demographic and political variables, Xit. The political control variables have to capture to
what extent the common pool argument might influence centralization (Besley and Coate,
2003). Roubini and Sachs (1989) argue that the broader a coalition the weaker its
budgetary discipline due to the common pool problem of the public budget. Broad-based
coalition governments on the cantonal level could have a tendency towards policy
centralization in order to satisfy a broader range of different constituencies. Therefore, a
coalition variable is included, measured by the number of parties in the cantonal cabinets.
On the other hand, Perotti and Kontopoulos (2002) make use of the total number of
ministers in the cabinet as a proxy for common pool problems. Therefore, the number of
cantonal ministers is additionally included in the model. The severance of the common
pool problem is mitigated by fiscal federalism.
The remaining variables included in the model are standard controls. Real cantonal
income per capita is used to find out whether less centralization is demanded in cantons
with higher income, as argued by Panizza (1999). The cultural background is mainly
captured by focusing on language areas thus adding the share of the German speaking
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population in a canton. With regard to different political preferences we include the

variable ideology that consists of an index within the range of 1 for right wing dominated
and 5 for left-wing dominated executive authority. Including these two variables is
important, because they indicate the preferences for government centralization in the
different Swiss cantons. The degree of centralization as well as the inclusion of direct
democratic decision-making rights in the cantonal constitutions may both be determined
by a third variable. This third variable might be citizens’ fiscal preferences (Pujol and
Weber, 2003; Funk and Gathmann, 2005). Pujol and Weber (2003) present evidence for
Switzerland that fiscal preferences, measured by cantonal voting outcomes in fiscally
influential referendums at the federal level, are nearly exclusively explained by the
differences between the Swiss language areas. In addition, partisan considerations may
play a role. Therefore, we have to include both variables in the model.
Finally, some remarks on the dependent variable are necessary. As stated by Oates
(1972) and Panizza (1999) the quantification of government centralization is no easy task.
Cross-country comparisons of expenditure and revenue ratios on the federal level may
inaccurately measure policy centralization due to the following problems: (i) Different
numbers of levels of sub-federal governments should be weighted differently. (ii) Local
spending and revenues do not reflect autonomy in spending and revenue decisions. (iii) The
existence of inter-governmental grants has an effect on the incentive structure of local
decision makers.
Fortunately, our data base accounts for these problems and therefore has a major
advantage compared to cross-country comparisons. First, all governments in our
regression have only one subordinate level. Second, it may well be that centralization of
public finances does not describe local autonomy precisely and it would be better to have
an indicator of constitutional autonomy. However, the fiscal constitution of Switzerland
comes close to the principle of fiscal equivalence, implying that people paying and
consuming public goods are also those who decide upon it (Schaltegger and Frey, 2003).
Thus, the Swiss data on centralization of public finances should be a relatively good proxy
for centralization of powers. Third, our data base allows to consider the impact of inter-
governmental grants in our analysis. In the Swiss context, fiscal centralization is a useful
proxy reflecting government centralization.10
As Table B2 in Appendix B indicates, the dependent variables exhibit most of their
variance between cantons and not within time. Running a simple regression in which
cantonal spending or revenue centralization are explained by cantonal dummy variables
provides an R2 of about 95 percent. Although the cross-section variation is thus highly
important, there obviously remains some variation across time that deserves to be
explained and might play a valuable role at the margin. Moreover, pure cross-section
analyses for Switzerland have the disadvantage that such a comprehensive set of
explanatory factors which could potentially affect centralization leaves an unacceptably
low level of degrees of freedom. In addition, the particular year chosen for the cross-
section analysis often also has its particularities that could more convincingly be ruled out
10
An additional argument that is worth mentioning is concerned with a possible centralization to the federal,
rather than the cantonal level. Indeed, economic and constitutional incentives to centralize government activities
might also lead to a centralization from the cantonal to the federal level and not only from the local to the
cantonal level. This effect is not captured by the data used in this paper. It would be necessary to use cross-country
data that have their particular shortcomings as well, as mentioned above.
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in a panel data approach. As there is some variation across time in the dependent variables
and in the explanatory variables, the use of panel data is thus justified.
Nevertheless, the explanatory variables should mainly capture the cross-section
variation of the dependent variables in order to provide for a valid explanation of fiscal
centralization in Switzerland. The dependent variables may therefore also vary more
strongly between cantons than across time. This is obviously the case according to Table
B2 in Appendix B, but also for the proposed econometric model. In the spirit of other
empirical investigations (e.g. Feld and Kirchgässner, 2001a) our empirical analysis is
performed using a pooled cross-sectional time-series (TSCS) model including time fixed
effects. This approach puts emphasis on the cross-section variation. Although (cross
section or two way) fixed effects models may be preferable as they provide useful
information about the longitudinal relationship, they do not seem to be appropriate in our
case. They leave the explanation of cross-canton differences to the cantonal intercepts
without any theoretical foundations and therefore capture a major part of the effect of
fiscal referendums since these institutions only slightly fluctuate over time. We estimate the
models by OLS with robust standard errors using cantonal (state) clustering. The results
for state means are also (partly) reported. Since the centralization ratios vary between zero
and one and are therefore censored, they are transformed to log odds. In addition, a
careful analysis of outliers is undertaken. Comparing the estimation results with and
without controlling for outliers indicates the extent of robustness of the estimates. Finally,
robustness tests on the impact of omitted variables are conducted.
5. Results
5.1. Baseline regressions
In Tables 2–4, we report the results of the econometric model. We first present evidence
on centralization of total spending and revenue as well as tax revenue. Second, we extend
the analysis to spending and revenue structure. The regressions in Tables 2–4 indicate that
the model performs relatively well according to the R2. The Jarque-Bera test statistics in
Table 2 indicate that the hypothesis of normality can be rejected for total spending, total
revenue and tax revenue. It is interesting to note that, in addition to the canton of Basle-
City, the cantons of Uri and Glarus can be frequently identified as outliers. Glarus is
known for high levels of centralization from the local to the cantonal levels in particular in
taxation. Uri obtains high amounts of grants from the federal government that the
cantonal government administers. Excluding the outliers from the regressions does not
change the main results. We thus proceed in Tables 3 and 4 by excluding the outliers from
the beginning and do not report the J.-B. test statistics anymore.11
The results in Table 2 indicate that our theoretical considerations are confirmed for total
revenue and total spending. The dummy for fiscal referendums has the expected negative
sign and is significant at the 1 percent level. Cantons with fiscal referendums in their
constitutions centralize total spending and total revenue to a lesser extent to the cantonal
level than those without fiscal referendums. Cantons with fiscal referendums transfer a
broader range of responsibilities to the local level compared to cantons where solely
representatives decide about policy centralization. Looking at total expenditure and total
11
The results including the outliers can be obtained from the authors upon request.
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Table 2
Log-odds estimates for government centralization, general expenditure, revenue and tax revenue, 26 Swiss
cantons, 1980–1998
Variable Expenditure I Expenditure II Revenue I Revenue II Tax revenue I Tax revenue II
Fiscal referendum dummy 0.203*** 0.161*** 0.195*** 0.156*** 0.114 0.133**

(2.93) (3.35) (2.90) (3.23) (1.43) (2.59)
Spending threshold 0.003** 0.003** 0.003** 0.003** 0.002 0.001*
(2.64) (2.69) (2.49) (2.47) (1.37) (1.76)
Signature requirement 2.289 0.207 1.963 0.050 3.548 3.854
(0.58) (0.07) (0.52) (0.02) (0.57) (1.20)
Homogeneity 0.195 0.069 0.157 0.029 0.599 0.026
(1.20) (0.60) (0.97) (0.27) (1.59) (0.46)
Tax competition 0.031** 0.033*** 0.030** 0.033*** 0.003 0.018***
(2.69) (3.01) (2.74) (3.05) (0.18) (2.81)
Lump-sum granta 0.009* 0.097 0.072 0.031 0.216 0.334***
(0.05) (0.62) (0.38) (0.19) (1.10) (3.49)
Ratio of urban population 0.426 0.122 0.474* 0.175 0.530 0.073
(1.64) (0.65) (1.89) (0.97) (1.35) (0.50)
Populationc 0.085 0.057 0.062 0.037 0.037 0.046
(0.73) (0.41) (0.53) (0.27) (0.32) (0.44)
Fragmentationa 0.732 0.526 0.784* 0.579 0.959** 0.610*
(1.70) (1.37) (1.82) (1.51) (2.07) (1.84)
Minister 0.093*** 0.078*** 0.091*** 0.076** 0.047* 0.034*
(3.49) (2.85) (3.39) (2.80) (1.85) (1.81)
Cantonal incomea 0.353 0.304 0.382 0.341 0.710 0.017
(0.63) (0.86) (0.70) (0.99) (0.89) (0.06)
Coalition 0.076* 0.010 0.072* 0.007 0.092 0.012
(1.87) (0.39) (1.78) (0.26) (1.60) (0.57)
Ideology 0.044 0.047 0.042 0.045 0.096 0.081**
(1.07) (1.54) (1.06) (1.54) (1.68) (2.77)
Language 0.152 0.220** 0.163 0.225** 0.275 0.165**
(1.13) (2.43) (1.24) (2.54) (1.48) (2.21)
Dummy Basel-Stadt 1.568*** 1.542*** 1.605*** 1.577*** 1.452*** 1.279***
(11.96) (14.28) (12.36) (14.64) (7.66) (16.85)
Dummy Uri – 0.468*** – 0.457*** – 0.376***
(10.16) (10.18) (6.90)
Dummy Glarus – 0.336*** – 0.334*** – 0.970***
(5.27) (5.38) (14.14)
Dummy – 0.025 – 0.020 – 0.006
Uni-Kantone (0.30) (0.25) (0.10)
Observations 494 494 494 494 494 494

R2 0.852 0.912 0.856 0.914 0.770 0.950
Jarque-Bera 45.159*** 2.007 134.041*** 4.929* 126.238*** 0.006
Note: Government centralization stands for the state share of state and local expenditures. t-values are given in
parentheses. They are computed with robust standard errors according to the clustering method (cantonal
clusters) using STATA 7.0. All regressions contain 19 year-dummies whose coefficients are not reported. ***, **
and * indicate significance at 1%, 5% and 10% levels, respectively. a,b,c: scaled by 103, 105, 107, respectively for
readability. The Jarque Bera test statistic is a test on the null hypothesis of normality of the residuals.
revenue centralization, we thus find encouraging evidence supporting our hypothesis. In

the case of tax revenue, the fiscal referendum variable does not prove to be significant. This
is however mainly the case because of the very high centralization of taxation in the canton
626
Table 3
Log-odds estimates for government centralization, expenditure structure, 26 Swiss cantons, 1980–1998
Variable Administration Security Culture and Health Welfare Education Finance Traffic Economy Environment
recreation
Fiscal referendum dummy 0.225 0.050 0.078 0.797*** 0.228** 0.216** 0.173 0.067 0.223** 0.117
(0.41) (0.77) (0.78) (3.80) (2.08) (2.11) (1.52) (0.81) (2.12) (1.11)
Spending threshold 0.001 0.002 0.000 0.025*** 0.001 0.004* 0.004 0.000 0.002 0.006**
L.P. Feld et al. / European Economic Review 52 (2008) 611–645

(0.49) (1.48) (0.12) (4.22) (0.22) (1.71) (1.62) (0.19) (0.64) (2.45)
Signature requirement 4.086 2.634 0.382 12.081 12.711* 12.546* 12.184 6.750 21.170** 11.909
(1.03) (0.46) (0.06) (0.88) (1.97) (2.05) (1.37) (1.44) (2.53) (1.45)
Homogeneity 0.005 0.361* 0.031 0.510 0.304 0.405** 0.476* 0.182 0.114 0.141
(0.05) (1.75) (0.17) (0.85) (1.44) (2.63) (1.74) (0.80) (0.30) (0.61)
Tax competition 0.029** 0.031** 0.010 0.234*** 0.031 0.060*** 0.026* 0.024 0.035 0.042*
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(2.14) (2.58) (0.48) (4.26) (1.26) (3.79) (1.84) (1.63) (1.45) (1.94)
Lump-sum grantsa 0.022 0.136 0.187 2.477*** 0.227 0.084 0.346 0.021 0.148 0.583**
(0.14) (0.47) (0.75) (3.37) (0.76) (0.26) (1.02) (0.09) (0.35) (2.23)
Ratio of urban population 0.241 0.091 0.219 1.302 0.073 0.111 0.430 0.263 0.910** 0.382
(1.03) (0.28) (0.60) (1.53) (0.18) (0.29) (1.00) (1.06) (2.09) (0.83)
Populationc 0.100 0.033 0.194 0.177 0.359 0.358 0.100 0.078 0.456 0.022
(0.58) (0.17) (0.93) (0.25) (1.38) (1.43) (0.49) (0.55) (1.54) (0.07)
Fragmentationa 0.245 0.644 1.151** 5.363** 0.888 0.350 2.124*** 1.118** 0.004 0.006
(0.60) (1.02) (2.46) (2.29) (1.55) (0.44) (3.93) (2.69) (0.00) (0.01)
Minister 0.033 0.092*** 0.070 0.311** 0.021 0.181*** 0.106*** 0.019 0.254*** 0.125***
(1.25) (2.82) (1.42) (2.25) (0.49) (3.12) (3.08) (0.57) (3.27) (2.82)
Coalition 0.038 0.007 0.052 0.086 0.132** 0.081* 0.075 0.001 0.009 0.054
(1.09) (0.21) (1.22) (0.61) (2.29) (1.81) (1.42) (0.02) (0.12) (0.89)
Cantonal incomea 0.439 0.076 0.753 2.903* 0.087 0.823* 0.636 0.115 0.652 0.823
(0.88) (0.15) (0.99) (1.80) (0.11) (1.84) (0.67) (0.16) (0.83) (0.97)
Ideology 0.003 0.027 0.078 0.401** 0.089 0.037 0.074 0.034 0.004 0.052
(0.07) (0.47) (1.23) (2.62) (1.24) (0.54) (0.99) (0.92) (0.05) (0.60)
Language 0.177 0.277* 0.027 0.692 0.720*** 0.429* 0.265 0.628*** 0.001 0.416**
(1.50) (1.75) (0.14) (1.22) (3.12) (2.00) (0.96) (4.17) (0.00) (2.12)
Dummy Basel-Stadt 1.229*** 2.242*** 1.963*** 0.469*** 1.426*** 1.409*** 1.167*** 1.314*** 0.456* 1.904***
(9.29) (14.74) (8.83) (0.89) (5.72) (6.65) (5.03) (8.71) (1.80) (7.99)
Controlling outliers Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Observations 494 494 494 494 494 494 494 494 494 494
R2 0.814 0.871 0.765 0.722 0.794 0.828 0.596 0.711 0.576 0.767
For notes see Table 2.

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Table 4
Log-odds estimates for government centralization, revenue structure, 26 Swiss cantons, 1980–1998
Variable User charges Tax on Tax on Tax on Tax on Tax on

income and property income profits capital
property (wealth)
(wealth)
Fiscal referendum 0.444*** 0.134** 0.085* 0.110** 0.486 0.460

dummy (3.98) (2.68) (1.85) (2.56) (0.65) (0.62)
Spending threshold 0.011*** 0.002** 0.003*** 0.003*** 0.025 0.025
(3.32) (2.14) (3.66) (3.84) (1.14) (1.13)
Signature requirement 2.918 3.871 2.862 3.520 22.957 23.362
(0.33) (1.22) (1.01) (1.09) (0.56) (0.57)
Homogeneity 0.472** 0.021 0.072 0.039 1.166 1.249
(2.37) (0.31) (1.14) (0.62) (0.95) (1.02)
Tax competition 0.082*** 0.019*** 0.022*** 0.024*** 0.194 0.195
(3.34) (3.11) (3.35) (3.98) (1.52) (1.54)
Lump-sum grantsa 1.141** 0.312** 0.197* 0.339*** 2.857 2.937
(2.78) (2.81) (1.90) (3.38) (1.36) (1.41)
Ratio of urban 0.851* 0.071 0.301* 0.317* 8.458* 8.447*
population (1.85) (0.47) (1.94) (2.08) (1.95) (1.96)
Populationc 0.115 0.054 0.044 0.031 3.618* 3.645*
(0.33) (0.52) (0.43) (0.32) (1.80) (1.82)
Fragmentationa 1.972 0.615* 0.007 0.096 17.015* 17.030*
(1.67) (1.88) (0.02) (0.31) (1.97) (1.98)
Minister 0.191** 0.032* 0.026 0.035* 0.500 0.500
(2.51) (1.71) (1.32) (1.94) (1.45) (1.46)
Coalition 0.007 0.016 0.020 0.016 0.468 0.484
(0.09) (0.75) (0.88) (0.75) (1.32) (1.37)
Cantonal incomec 1.704** 0.052 0.448 0.253 3.085 3.104
(2.17) (0.19) (1.64) (1.04) (0.61) (0.62)
Ideology 0.095 0.084** 0.070** 0.057** 1.147* 1.171*
(1.17) (2.75) (2.50) (2.18) (1.76) (1.81)
Language 0.249 0.163** 0.223** 0.201** 0.782 0.761
(0.70) (2.28) (2.86) (2.61) (0.52) (0.51)
Dummy 1.274*** 1.284*** 8.790*** 0.878*** 4.167*** 10.947***
Basel-Stadt (4.36) (17.15) (113.25) (11.79) (2.45) (6.45)
Controlling outliers Yes Yes Yes Yes Yes Yes
Observations 494 494 494 494 494 494
R2 0.767 0.935 0.997 0.945 0.550 0.756
of Glarus. Controlling for that outlier, the fiscal referendum dummy becomes significant at
the 1 percent level as well.
The influence of fiscal referendums on fiscal centralization is further qualified by the
estimates on the spending threshold. As expected, the spending threshold has a positive
impact and is significant at the 5 percent level in the spending and revenue equations
whether outliers are controlled for or not. In the case of tax revenue, the control of outliers
induces the spending threshold to become significant at the 10 percent level. The higher the
spending threshold and thus the less restrictive the fiscal referendum, the more centralized
is spending, revenue and tax revenue. Finally, the signature requirement for the legislative
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initiative does not have any significant impact in any of the six equations presented in
Table 2.
The same result holds, though to a lesser extent, with respect to the budgetary structure
of government activities, as the results in Table 3 (controlling for outliers and including the
dummy variable for university cantons) indicate. On the expenditure side, fiscal
referendums are associated with a significantly lower centralization in the case of spending
for health, welfare, education and the economy (including agricultural subsidies).
Centralization of administration, security, culture and recreation, finance and environ-
mental expenditures is not significantly affected by fiscal referendums. Since the spending
categories where fiscal referendums have a restrictive impact are the most important ones,
it can be concluded that the fiscal referendum exerts the expected restrictive impact on
policy centralization.12 The spending threshold reaches conventional significance levels
only in the health, education and environmental spending equations. It has the expected
positive sign in these equations. The signature requirement for legislative initiatives has an
ambiguous impact on different spending categories. The higher the signature requirement
(and the less easily an initiative could make it to the ballots), the more centralized is
education and economy spending, the less centralized however is welfare spending. While
the fiscal referendum and the initiative are substitutes in the case of education and
economic policy, they are complements in the case of social policy.
The results for the revenue structure in Table 4 (again controlling for outliers and
university cantons) indicate that cantons allowing for a great extent of fiscal referendums
are less centralized on the cantonal level as far as user charges and the different kinds of
taxes are concerned. The fiscal referendum dummy has again the expected negative sign
and is significant at the 1 percent level in the case of centralization of user charges. It is
significant at the 5 percent level with the expected negative sign in the case of centralization
of income and property (wealth) taxes. The property (wealth) tax component is only
significantly influenced by the fiscal referendum at the 10 percent level. Profit and capital
tax centralization are not significantly influenced by the fiscal referendum. The spending
threshold has the expected positive impact and is significant in the same revenue categories
as the fiscal referendum dummy. The signature requirement for the legislative initiative
does not have any significant influence on revenue centralization. Since the most important
indirect taxes, the VAT and the mineral oil tax, are in the realm of the federal government
in Switzerland, we cannot say anything about centralization of indirect taxes. In addition,
unimportant tax sources at the Swiss sub-federal level such as car and dog taxes are not
considered because they are usually completely centralized to the cantonal level lacking
variation between cantons. Finally, inheritance taxes are not considered because they are
(nearly) pure cantonal taxes as well. These results strongly support the hypothesis that the
availability of fiscal referendums impedes centralization.
The control variables for the extent of fiscal federalism exhibit an interesting pattern.
Most of them are not significant in the equations or do not have a consistent impact across
spending and revenue structure. This also holds for homogeneity measured as the ratio of
median to mean income. It does not have any significant impact on the centralization of
total spending, total revenue or tax revenue whether outliers are controlled for or not
(Table 2). As Tables 3 and 4 indicate, a higher income homogeneity is associated with
12
Education spending covered about 22.8 percent of total cantonal and local spending followed by health
spending with 17.2 percent and welfare spending with 16.2 percent.
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significantly more centralization in the case of security and education expenditure as well
as revenue from user charges. All in all, income homogeneity does not have a consistent
impact on centralization of government activities in Switzerland. These results do neither
support the traditional tax competition hypothesis that decentralized redistribution is
impossible, nor the argument that government activity can be centralized if tastes are
homogeneous. However, the rather mixed results are not really surprising since important
programs of income redistribution like the federal income tax and social security are
centralized to the federal level in Switzerland such that some arguments from the
traditional theory of public finance do not apply to fiscal centralization within cantons
(Feld, 2000).
The coefficients of tax competition between Swiss cantons show that the better the
situation of a canton in the tax competition game, the more its government activities are
centralized. Put differently, the stronger tax competition among cantons is, in the sense
that the competing cantons set their tax rates relatively low as compared to the canton
considered, the more decentralized taxes and spending are to the local level. This holds for
general revenue, tax revenue and general spending (Table 2). With respect to the spending
structure this decentralizing impact of tax competition holds especially for administration,
security, health, education, and environmental spending whereas there is a centralizing
impact in the case of finance spending (Table 3). With respect to revenue structure, there is
a robust, significant impact of tax competition on the decentralization of user charges and
the different kinds of tax revenue (Table 4) with the exception that the centralization of
profit and capital taxes is not significantly influenced by tax competition. The more the
other competing cantons increase their tax burden, the more taxes are centralized to the
cantonal level. Cantons with a relatively bad situation in the tax competition game shift
taxes and spending to the local level in order to be bailed-out by their communities. This is
a rather short-sighted strategy given that income tax competition is more intense at the
local than at the cantonal level (Feld and Kirchgässner, 2001b).
Economies of scale do not consistently affect fiscal centralization to the cantonal level.
The higher the share of urban population in the whole population, the less centralized is
total revenue (marginally significant at the 10 percent level) (Table 2), revenue from user
charges, profits and capital tax revenue (Table 4), and the more centralized is property
(wealth) and income tax revenue as well economy expenditure (Table 3). Moreover, the
population size of the canton and fragmentation of a canton into many small communities
do not have consistent or robust impacts on centralization. Although there is a
significantly negative impact of the variable ‘geographical fragmentation’ on centralization
of total revenue and tax revenue, the impact of geographical fragmentation is not robust to
the control of outliers and university cantons in these cases. There are also very
differentiated results depending on the spending and revenue category. Fragmentation
significantly positively affects centralization of spending on culture and recreation, as well
as profit and capital tax revenue. It is however negatively influencing the centralization of
income and property (wealth) tax revenue as well as spending for health, finance and
traffic. This may indicate a trade-off. On the one hand, the impossibility of exploiting
economies of scale in the consumption of publicly provided goods for small jurisdictions
forces cantons to centralize a comparably broader range of government activities. On the
other hand, a higher number of local incumbents restricts the stability of vote trading for
collusion among jurisdictions and therefore leads to less policy centralization. Brennan and
Buchanan (1980) predict that grants-in-aid are an instrument for collusive agreements
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between governments weaken the power of fiscal federalism. The empirical evidence does
not support this hypothesis in the Swiss case. The higher the lump-sum grants, the less
centralized are the different tax categories (Table 4) while there is only a marginally
significant higher centralization due to lump-sum grants in the case of total spending.
From the remaining control variables, the ministers and coalition variables are
particularly interesting. The higher the number of ministers, the higher is centralization of
government activity.13 This holds for total spending and revenue centralization (significant
at the 1 percent level) as well as for tax revenue (significant at the 10 percent level), but also
for user charges, taxes on income and property (wealth), in particular income taxes, as well
as security, health, education, finance, economy and environmental expenditure. Aside the
fiscal referendum dummy and the tax competition variable, this is thus the variable with
the most consistent impact on fiscal policy centralization in the Swiss cantons according to
our analysis. As assumed in the theoretical model, the common pool problem induced by a
higher number of ministers in the cabinet provides incentives for fiscal policy centralization
in order to secure the political rents captured. The more parties are represented in the
cantonal cabinets, the stronger spending and revenue centralization are supposed to be.
This result does however not consistently and robustly hold for total spending or revenue
or for the spending and revenue categories. In most cases this variable is not significant.
The remaining control variables, ideology, language and cantonal income do not exhibit
consistent and clear-cut impacts on centralization. They are mostly insignificant.
Interestingly, income is also almost always insignificant, while the sign of its impact
varies across the spending and revenue structure. As the effects are insignificant, we are
reluctant to interpret these results in detail.
5.2. Robustness tests
Given the fact that the data used exhibit a stronger variation between cantons than
across time such that fixed effects regressions are not appropriate, some concerns about the
robustness of the results might come up. The first type of robustness check we thus
perform in Section 5.2.1 is focused on the overweighting of the cross-section characteristic
of the panel data. A second type of robustness check is done in order to cope with omitted
variables problems and the impact of influential observations on the estimation outcomes.
This robustness analysis follows in Section 5.2.2 and is accompanied by a discussion about
the endogeneity problem.
5.2.1. Cross-section and time series variation in the data

Table 5 for spending centralization, Table 6 for revenue centralization and Table 7 for
tax revenue centralization provide the results of the robustness analyses that focus on the
13
This result remains robust when we perform IV estimates using instruments for the ministers variable. As
instruments we alternatively used the university canton dummy, that never proofed to be significant in Tables 2–4,
or the time elapsed since the introduction of the women’s right to vote. According to the test statistics and the first
stage regressions only the university canton dummy proofed to be a valid instrument. In the IV regression for
spending centralization using this instrument, the fiscal referendum dummy had a coefficient of 0.478 and a t-
statistic of 3.38, thus remaining significant at the 1 percent level. The minister variable was still significant at the
5 percent level (t-statistic 2.60) with a coefficient of 0.187. Similar results obtained for revenue and tax revenue
centralization. The effect of fiscal referendums and of the size of cabinet thus remains robust to the
instrumentation of the minister variable. The full results can be obtained upon request.
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Table 5
Log-odds estimates for government centralization, spending, 26 Swiss cantons, 1980–1998, robustness CSTS
Variable Pooled Cluster Group means Cross-section Fixed effects Index

1998
Dummy fiscal referendum 0.407*** 0.407*** 0.510** 0.418** 0.054 –

(11.28) (3.41) (2.30) (2.22) (1.11)
Spending threshold 0.001 0.001 0.002 0.004 0.004*** –
(1.50) (0.51) (0.38) (1.24) (3.44)
Signature requirement 5.899** 5.899 19.072 1.490 2.772* 4.622
(2.02) (0.88) (0.87) (0.10) (1.78) (0.80)
Index fiscal referendum – – – – – 0.066**
(2.28)
Minister 0.116*** 0.116*** 0.182* 0.109 0.028** 0.047
(8.44) (3.11) (2.11) (1.45) (2.51) (1.32)
Coalition 0.169**** 0.169** 0.232* 0.173* 0.008 0.095
(9.19) (2.55) (2.02) (1.87) (0.69) (1.41)
Language 0.288*** 0.288 0.451 0.134 0.644** 0.208
(4.51) (1.13) (1.13) (0.47) (2.30) (0.71)
F-test: fiscal referendum – – – – 5.92*** –

dummy and thresholds
Observations 494 494 494 26 494 494

R2 0.601 0.601 0.453 0.728 0.200 0.510
Notes: All regressions contain 19 year-dummies whose coefficients are not reported. ***, ** and * indicate
significance at 1%, 5% and 10% levels, respectively.
cross-section nature of the panel data.14 In all of these regressions, we have not been
concerned with outliers. As will become evident in the next sub-section, the results improve
in the sense that significant effects become stronger if outliers are controlled for. The first
step of the analysis consists in demonstrating the effect of correcting standard errors by
clustering. The first column in all three tables presents the pooled cross-section time series
results with time dummies, but without any correction of standard errors. In the second
column, the clustering method is used to correct standard errors. Cantonal (state) clusters
are chosen in order to correct for the bias in standard errors that might occur in the panel
data due to the low variance across time. As can be seen from Tables 5–7, correcting
standard errors by state clustering considerably reduces the significance of each estimated
effect, thus corroborating earlier results by Feld and Matsusaka (2003). Compared to the
pooled regressions with clustering where almost each variable has a strongly significant
effect on fiscal centralization, only a few robust effects remain: The fiscal referendum
significantly reduces centralization, while cabinet and coalition size each significantly
increase centralization.
In essence this result is corroborated by the regressions on the group means in column 3
of the three tables. In these specifications, only the between effects are exploited in the
econometric analysis (see Besley and Case 2003). This specification comes closest to a
cross-section analysis, but without choosing a particular year that might offer its specificity
as a bias to the analysis. Again in these regressions, like in those employing the cantonal
(state) clustering only the fiscal referendum has a significantly negative effect on
14
For expositional reasons, the detailed results for the control variables are not reported in Tables 5–7. We only
focus on the main variables of interest. The full set of regressions can be obtained on request.
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Table 6
Log-odds estimates for government centralization, revenue, 26 Swiss cantons, 1980–1998, robustness CSTS
Variable Pooled Cluster Group means Cross section Fixed effects Index
1998
Dummy fiscal referendum 0.404*** 0.404*** 0.506** 0.406** 0.096* –

(11.09) (3.37) (2.27) (2.14) (1.92)
Spending threshold 0.001 0.001 0.002 0.003 0.004*** –
(1.22) (0.41) (0.33) (1.03) (3.20)
Signature requirement 5.657* 5.657 19.006 0.523 1.976 4.599
(1.92) (0.85) (0.86) (0.04) (1.24) (0.80)
(2.27)
Minister 0.115*** 0.115*** 0.180* 0.124 0.025** 0.046
(8.26) (2.96) (2.08) (1.58) (2.15) (1.29)
Coalition 0.167*** 0.167** 0.231* 0.172 0.022* 0.094
(8.97) (2.50) (1.99) (1.85) (1.84) (1.39)
Language 0.288*** 0.288 0.447 0.178 0.140 0.212
(4.47) (1.12) (1.11) (0.61) (0.49) (0.72)
F-test: fiscal referendum – – – – 5.56*** –

Observations 494 494 494 26 494 494

R2 0.592 0.592 0.442 0.729 0.191 0.502
Table 7
Log-odds estimates for government centralization, tax revenue, 26 Swiss cantons, 1980–1998, robustness CSTS
Variable Pooled Cluster Group means Cross-section Fixed effects Index

1998
Dummy fiscal referendum 0.304*** 0.304*** 0.340 0.271 0.031 –

(8.07) (2.65) (1.54) (1.01) (1.48)
Spending threshold 0.000 0.000 0.000 0.003 0.000 –
(0.03) (0.01) (0.07) (0.64) (0.20)
Signature requirement 6.892** 6.892 29.293 14.179 2.172*** 0.008
(2.26) (0.86) (1.34) (0.67) (3.28) (0.00)
(2.68)
Minister 0.068*** 0.068** 0.149 0.039 0.010** 0.014
(4.77) (2.10) (1.73) (0.52) (2.05) (0.44)
Coalition 0.178*** 0.178** 0.249* 0.200* 0.001 0.126
(9.29) (2.29) (2.18) (1.73) (0.12) (1.52)
Language 0.133** 0.133 0.393 0.156 0.269*** 0.141
(2.00) (0.53) (0.99) (0.37) (2.25) (0.57)
F-test: fiscal referendum – – – – 1.34 –

Observations 494 494 494 26 494 494

R2 0.543 0.543 0.286 0.614 0.263 0.499
centralization, while the common pool problems indicated by cabinet and coalition size
positively affect centralization. There is only one exception to this rule which stems from
tax revenue centralization. In Table 7, the negative effect of the fiscal referendum loses its
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significance when the regressions on the group means are conducted. Excluding the canton
of Glarus from the analysis, as in Table 2, the fiscal referendum exhibits again a significant
effect. In column 4, we also present an example for a cross-section analysis for the year
1998 which must be carefully interpreted due to the low degrees of freedom. Again, the
fiscal referendum exerts significant negative effects on centralization in this specification
while coalition size has a significantly positive effect. However, cabinet size has no
significant impact in this particular year.
The next step in the analysis, in column 5 of Tables 5–7, consists in explicitly reporting
the estimation results of the fixed effects regressions. The main institutional variables for
direct democracy are not totally time invariant although they do not vary much across
time such that a fixed effects regression is in fact feasible (though not useful).15 As
expected, the negative effect of the fiscal referendum on centralization becomes
insignificant. The few changes of the mandatory fiscal referendum dummy across time
are too noisy to leave a significant effect. However, the spending threshold now adopts a
significantly positive effect at the 1 percent level for spending and revenue centralization.
Indeed, the spending thresholds vary much more strongly within cantons over time such
that the measured restrictive impact of the fiscal referendum is now captured by the
spending threshold. The spending threshold variable is actually an interaction term
between the fiscal referendum dummy and the thresholds. We have thus also performed an
F-test on joint significance of the fiscal referendum dummy and the spending threshold,
and report the test results in the lower panel of Tables 5–7. The hypothesis that both
variables are not jointly affecting spending and revenue centralization can be rejected at
the 1 percent level. It reaches a significant effect on tax revenue centralization also, if
outliers are controlled for. As the different institutional features of fiscal referendums have
joint effects, we finally include the fiscal referendum index calculated by Frey and Stutzer
(2000) and introduced in Table 1. The index replaces the fiscal referendum dummy and the
spending threshold in column 6 of Tables 5–7. The fiscal referendum exhibits a negative
impact in all regressions including on tax revenue centralization.16
The fixed effects regressions have the disadvantage that they capture much of the
variation of scarcely time variant factors like the direct democracy variables. We have thus
performed fixed effects regressions at the first step without the inclusion of the three direct
democracy variables. In the second step, we have saved the estimated fixed effects and
explained them by the three institutional variables. In Fig. 3, the results for the interaction
term of the fiscal referendum dummy and the spending thresholds are visualized. Fig. 3
reveals the expected positive effect of the spending threshold on spending centralization.
Finally, this additional analysis corroborates our baseline results that fiscal referendums
restrict fiscal centralization. It should be noted, however, that the fixed effects regressions
exhibit effects of the control variables that are difficult to rationalize. Compared to the
15
During the time period chosen for the analysis, i.e. between 1980 and 1998, the cantons of Aargau (in 1982),
Berne (1995) and Valais (1995) abolished the mandatory fiscal referendum. In addition, the cantons of Nidwalden
(1996), Appenzell a.Rh. (1997) and Obwalden (1998) switched from a system of cantonal meetings with fiscal
decisions regularly taking place to the fiscal referendum. This latter institutional change does not affect the
dummy of fiscal referendums because fiscal decisions in cantonal meetings can be interpreted as equivalent to
fiscal referendums. Finally, changes in the spending thresholds occurred in Fribourg (1986), Solothurn (1988),
Schaffhausen (1989), Thurgau (1990), Uri (1994) and Neuchâtel (1995). See Trechsel and Serdült (1999) for this
information.
16
The fiscal referendum index has a stronger within variation than the fiscal referendum dummy (Table B2).
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90
80
70
y = 3.3478x + 18.837
R2 = 0.0152
60
50
threshold_80
Linear (threshold_80)
40
30
20
10
0
-4 -3 -2 -1 0
Fig. 3. Relationship between fixed effects and the fiscal referendum with spending thresholds.
pooled cross-section time series analyses, the fixed effects results are much less reasonable
concerning the general structure of the control variables. This leaves us with some
justification for choosing the TSCS model instead of a fixed effects specification.
Summarizing this first part of the robustness analysis, it can be concluded that the effect
of fiscal referendums on fiscal centralization obtained in the baseline regressions survives
most of the specifications in which the importance of the cross-section variation of the
panel data is underlined. It becomes obvious that the pooled TSCS model with corrected
standard errors (cantonal clusters) is as unfriendly to the fiscal referendum effect as the
regressions on the group means. This is why this approach is chosen in the baseline
regressions. Pure cross-section analyses suffer from particular year effects as demonstrated
in this section while the fixed effects regressions do not provide valid results overall.
Finally, we have chosen to show the singular effects of the dummy of fiscal referendums
and the spending thresholds instead of aggregating them in the fiscal referendum index in
order to be certain that the fiscal referendum instead of the aggregation norm of the index
affect fiscal centralization.
5.2.2. Endogeneity, omitted variables and outliers

One argument often heard recently in comparative institutional analysis in political
economics is the potential endogeneity of institutions and the economic outcome variables.
As mentioned in Section 5, it is usually argued that the choice of a particular constitutional
provision and the choice of a particular fiscal or economic policy are driven by an unobserved
third variable. In the case of Swiss direct democracy, it is contended that fiscal preferences are
this third variable (Pujol and Weber, 2003; Funk and Gathmann, 2005). Without coming up
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with a too strong methodological discussion about economic science, for example by
questioning (with some justification) why preferences should be more heavily relied upon than
institutional restrictions, this argument is taken seriously in this section.
There are different possibilities to consider different preferences across Swiss cantons. Pujol
and Weber (2003) and Funk and Gathmann (2005) derive fiscal preferences by categorizing
cantonal voting outcomes in fiscally influential referendums at the federal level on a
conservativeness scale. The first paper presents evidence that these fiscal preferences are
nearly exclusively explained by the differences between the Swiss language areas. In addition,
partisan considerations may play a role. Since these results are well-known, both variables are
included in the baseline estimations of our econometric model. Ideology, measured by the
share of leftist parties in government, does almost never prove to be significant while the share
of the German speaking population in the cantons has a significantly negative effect on fiscal
centralization when outliers are controlled for. In column 1 of Tables 8–10, ideological
differences are also captured by the share of leftist parties in parliament.17 Moreover, the size
of the legislature is included in order to provide an alternative proxy of the common pool
problem. Both variables are not significant in any of the models. The impact of the fiscal
referendum remains robust to these changes in the specification.
Fiscal preferences could also be heavily affected by the economic conditions in a canton.
For example, the canton may have suffered strongly from structural change such that, first,
unemployment rates are relatively high, or, second, after the younger and higher skilled
people have found jobs in other cantons and emigrated, a higher concentration of retired
people of an age above 65 remains in the canton. Both variables are included in the model
shown in column 2 of Tables 8–10. While the unemployment rate has a significantly
negative effect on spending, revenue and tax revenue centralization, the impact of the share
of people older than 65 significantly positively affects fiscal centralization. As can be seen
in column 6 of Tables 8–10, these effects are however not robust to the inclusion of outliers.
In contrast, the impact of the fiscal referendum on fiscal centralization remains strongly
robust to the inclusion of these additional variables. Its effect is even reinforced.
Another possibility to consider differences in fiscal preferences across cantons consists in
the inclusion of variables capturing religious tastes. In Switzerland, the main differences
occur with respect to the two Christian confessions, Catholics and Protestants. As both are
strongly correlated with each other, we only include them individually in Columns 3 and 4
of Tables 8–10. Including both together does not affect the robustness of the fiscal
referendum dummy. Including them individually, both variables of religious affiliation are
insignificant and the impact of the fiscal referendum dummy remains robust.
Linder (1994) has argued some time ago that Switzerland is characterized by cultural cross-
cleavages such that the cultural divide on different issues does not follow along the same
geographical lines. Language differences between the German, French and Italian speaking
parts of Switzerland, religious differences between protestants and catholics, the urban-
countryside divide and ideological differences between conservatives (right-center parties) and
progressives (left-center parties) do not geographically coincide. In order to test the
robustness of the negative fiscal referendum effect on fiscal centralization, we control for all
these different factors and find that the fiscal referendum does have a robust negative effect.
We have not included a variable of fiscal preferences in the sense of Pujol and Weber (2003)
or Funk and Gathmann (2005) in the analysis though. They measure fiscal preferences with
17
Again the detailed results for the control variables can be obtained on request.
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Table 8
Log-odds estimates for government centralization, spending, 26 Swiss cantons, 1980–1998, robustness: omitted
variables and outliers
Variable Cluster Cluster Cluster Cluster Cluster Cluster Hadi
Dummy fiscal referendum 0.390*** 0.497*** 0.407*** 0.322*** 0.203*** 0.234** 0.193*
(3.49) (4.50) (3.41) (2.90) (2.93) (2.67) (1.71)
Spending threshold 0.001 0.002 0.001 0.001 0.003** 0.003** 0.002***
(0.35) (1.18) (0.49) (0.16) (2.64) (2.07) (3.71)
Signature requirement 5.930 7.574 5.886 3.080 2.289 2.495 12.417***
(0.93) (1.13) (0.90) (0.48) (0.58) (0.59) (5.03)
Minister 0.113*** 0.141*** 0.116*** 0.098** 0.093*** 0.089** 0.069***
(3.18) (3.69) (2.96) (2.59) (3.49) (2.26) (3.81)
Coalition 0.167** 0.122*** 0.169** 0.169** 0.076* 0.057 0.124***
(2.53) (2.33) (2.56) (2.57) (1.87) (1.29) (7.63)
Ideology 0.092 0.106 0.106 0.086 0.044 0.031 0.092**
(1.17) (1.52) (1.33) (1.27) (1.07) (0.76) (2.04)
Language 0.284 0.259 0.287 0.288 0.152 0.113 0.360*
(1.05) (1.13) (1.14) (1.17) (1.13) (0.73) (1.80)
Share of leftist 0.017 – – – – – –
Parties in parl. (0.35)
Size of legislature 0.001 – – – – – –
(0.23)
Unemployment rate – 0.047* – – – 0.018 –
(1.86) (0.95)
Share of people older than 65 – 0.071*** – – – 0.002 –
(3.33) (0.17)
Share of catholic population – – 0.001 – – – –
(0.00)
Share of protestant population – – – 0.334 – – –
(1.08)
Controlling outliers No No No No Yes Yes Yes
Observations 494 494 494 494 494 494 265
R2 0.603 0.716 0.601 0.610 0.852 0.865 0.728
For notes see Table 5. As outliers, Basel-Stadt is always identified. In addition, Glarus and Uri often are outliers.
University cantons do however not have significantly higher or lower centralization ratios. The Hadi analysis
identifies multiple outliers in multivariate data and allows for a robustness check on outliers.
outcomes of federal referendums. As a fiscal referendum does not exist at the Swiss federal
level, this approach might introduce a bias in the estimation approach as citizens in cantons
with fiscal referendums vote more conservatively at the federal level because they cannot
control spending by a fiscal referendum. Voting behavior at the federal level and the fiscal
referendum are thus substitutes. The introduction of a measure of federal voting behavior
into an empirical analysis at the cantonal level without the existence of a similar institution as
the cantonal fiscal referendum at the federal level will thus lead to biased results.
It should also be noted that the validity of the argument about preferences as a third
variable influencing both the choice of the fiscal referendum and fiscal policy should not be
exaggerated. The fiscal referendum exists since the year 1291 in the form of fiscal decisions at
the cantonal meetings in Obwalden and Nidwalden (Feld and Matsusaka, 2003). It was
adopted by a larger part of the cantons in the 19th century. Although four cantons
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Table 9
Log-odds estimates for government centralization, revenue, 26 Swiss cantons, 1980–1998, robustness: omitted
Dummy fiscal referendum 0.386*** 0.497*** 0.407*** 0.320*** 0.195*** 0.234** 0.178*
(3.43) (4.50) (3.36) (2.86) (2.90) (2.67) (1.66)
Spending threshold 0.001 0.002 0.001 0.001 0.003** 0.003** 0.002***
(0.26) (1.18) (0.41) (0.08) (2.49) (2.07) (3.39)
Signature requirement 5.733 7.574 5.765 2.885 1.963 2.495 11.437***
(0.91) (1.13) (0.89) (0.45) (0.52) (0.59) (4.85)
Minister 0.111*** 0.141*** 0.115*** 0.097** 0.091*** 0.089** 0.062***
(2.99) (3.69) (2.83) (2.47) (3.39) (2.26) (3.61)
Coalition 0.164** 0.122** 0.167** 0.167** 0.072* 0.057 0.113***
(2.48) (2.33) (2.51) (2.52) (1.78) (1.29) (7.30)
Ideology 0.096 0.106 0.112 0.091 0.042 0.031 0.074*
(1.22) (1.52) (1.37) (1.32) (1.06) (0.76) (1.72)
Language 0.281 0.259 0.288 0.288 0.163 0.113 0.331*
(1.02) (1.13) (1.13) (1.16) (1.24) (0.73) (1.73)
Share of leftist parties in 0.018 – – – – – –
parliament (0.36)
(0.28)
Unemployment rate – 0.047* – – – 0.018 –
(1.86) (0.95)
(3.33) (0.17)
(0.04)
(1.06)
Observations 494 494 494 494 494 494 265
R2 0.594 0.716 0.592 0.601 0.856 0.865 0.750
introduced the fiscal referendum after 1930 and some others abolished it recently in order to
switch to the optional fiscal referendum, a thorough analysis of the endogeneity of these
institutions would require to look much more carefully into the history of direct democracy in
Switzerland. Finally, it should also be noted that fiscal preferences might indeed have led to
the adoption of the fiscal referendum in the 19th century (or earlier) in order to obtain
conservative fiscal policies from thereon. But even then, it is the institution of the fiscal
referendum that has a causal effect on fiscal policy, in our case on fiscal centralization, today.
The final step in the robustness analysis consists in a further discussion of the outlier
problem. In the last three columns of Tables 8–10, the effect of controlling for outliers on
estimation outcomes is demonstrated. The first regression in column 5 of Tables 8–9 simply
reproduces the respective regressions from Table 2 for comparisons sake. In these estimations,
a dummy for Basel city is included in the regressions on spending and revenue centralization.
In column 5 of Table 10, a dummy for the canton of Glarus is introduced in addition, but in
contrast to Table 2, the dummy for the canton of Uri is excluded in order to demonstrate the
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Table 10
Log-odds estimates for government centralization, tax revenue, 26 Swiss cantons, 1980–1998, robustness: omitted
Dummy fiscal referendum 0.358*** 0.413*** 0.448*** 0.393*** 0.187** 0.217*** 0.183
(3.11) (4.46) (3.33) (2.84) (2.73) (2.84) (1.00)
Spending threshold 0.000 0.001 0.002 0.001 0.001 0.001 0.002*
(0.17) (0.70) (0.79) (0.39) (1.13) (1.61) (1.81)
Signature requirement 9.286 8.869 12.880 9.843 6.128 5.949 8.299**
(1.26) (1.12) (1.50) (1.13) (1.41) (1.28) (2.07)
Minister 0.057 0.099*** 0.099** 0.087** 0.041 0.058** 0.070**
(1.56) (3.12) (2.46) (2.11) (1.64) (2.15) (2.39)
Coalition 0.181** 0.120** 0.177** 0.178** 0.025 0.026 0.215***
(2.46) (2.43) (2.47) (2.37) (0.70) (0.80) (8.12)
Ideology 0.007 0.043 0.075 0.065 0.075** 0.052 0.203***
(0.08) (0.63) (0.85) (0.81) (2.39) (1.57) (2.76)
Language 0.017 0.093 0.157 0.132 0.051 0.088 0.077
(0.06) (0.47) (0.65) (0.52) (0.39) (0.66) (0.24)
Share of leftist 0.062 – – – – – –
Parties in parliament (0.92)
(1.25)
Unemployment rate – 0.060** – – – 0.031** –
(2.50) (2.42)
(4.11) (1.60)
(1.56)
(0.76)
Observations 494 494 494 494 494 494 265
R2 0.577 0.725 0.582 0.553 0.918 0.924 0.556
Glarus-effect in tax revenue centralization. These influential outliers influence the estimated
effect of the spending thresholds in particular. It should be noted again that the significant
influence of the unemployment rate and the share of people older than 65 vanishes in almost
all regressions when these outliers are controlled for (column 6). Finally, in column 7 we report
the results of a much more radical robustness test on the impact of influential outliers
proposed by Hadi (and provided in STATA 7.0). These estimates demonstrate that up to
about half of the observations could be influential. The fiscal referendum dummy still remains
significant at least at the 10 percent level, while the spending threshold is significant at the 1
percent level. Overall, the impact of fiscal referendums on fiscal centralization is robust.
6. Conclusions
In this paper, an empirical test is performed as to whether fiscal referendums prevent

centralization of government activity. On the basis of some theoretical considerations in
ARTICLE IN PRESS
the spirit of Besley and Coate (2003) and formulated explicitly in a companion paper (Feld,
Schaltegger and Schnellenbach, 2006), we argue that the degree of centralization should be
expected to be lower under direct than under representative democracy. If spillovers of
public goods between two jurisdictions exist and individual preferences in the jurisdictions
are sufficiently homogeneous, citizens have incentives to centralize policies. Compared to
elected representatives, centralization is however lower under direct democracy because the
common pool problem is more severe in representative democracy and it is likely that
representatives extract political rents. This is anticipated by the voters. With direct
democratic institutions on the central level, implying non-cooperative decision-making,
voters face additional uncertainty, not knowing precisely ex ante which position the
median voter will have in the newly shaped electorate. In a representative system, the
uncertainty about the outcome of the centralized political process can be reduced, for
instance by gerrymandering. Both arguments together imply that centralization is more
likely to be agreed upon by local representatives compared to local median voters.
This hypothesis is tested in an econometric analysis of the centralization of spending and
revenue using panel data of Swiss cantons for the period 1980 to 1998. Our results broadly
support the hypothesis that fiscal referendums restrict the ability to centralize government
activities. This does not only hold with respect to the centralization of revenue and
spending in general, but also in detail for several spending and revenue categories. In
addition to the referendum, fiscal federalism plays a role, although the impact of different
proxies for the extent of fiscal federalism is heterogeneous. For example the less
comfortable the position of a canton in the tax competition game with other cantons, the
more government activities are decentralized to the local level. Moreover, the variables
capturing common pool problems in the executive, cabinet and coalition size, exert
relatively robust positive influences on fiscal centralization.
The restrictive impact of the fiscal referendum on fiscal centralization is robust in several
specifications that underline the importance of the cross-section variation in the data set.
There is a negative and significant effect of the fiscal referendum on centralization in
regressions on group means and in pure cross-section analyses. Even in fixed effects
regressions, the fiscal referendum exerts a joint restrictive effect on fiscal centralization in
interaction with the spending thresholds above which the fiscal referendum becomes
binding. Moreover, these results are robust to omitted variables and to outliers.
From a positive perspective, referendums are associated with less centralization of
government activities. This does however not imply any particular normative interpreta-
tion. The models by Redoano and Scharf (2004) or Lockwood (2004) for example start
from the perspective that centralization is useful due to inter-jurisdictional externalities or
economies of scale, while Besley and Coate (2003) and Persson and Tabellini (2000)
underline the negative effects of political failures. In fact, centralization might be a
consequence of political failure, if representatives at the central level have a vested interest
in centralization to obtain personal rents or securing re-election. Then referendums serve
to safeguard the proper interests of subordinate jurisdictions. The results in this paper do
not help to resolve the normative discussion. This must be left to future research.
Acknowledgments
We would like to thank Charles Blankart, Allan Drazen, Wolfgang Eggert, Bruno Frey,
Gerald Hosp, Gebhard Kirchgässner, Michael Lechner, John Matsusaka, Jørn Rattsø,
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Thomas Stratmann, an anonymous referee as well as the participants of the CESifo Area
Conference on Public Sector Economics in Munich, the Meetings of the Public Choice
Society in San Diego and of the European Public Choice Society in Belgirate (Italy), and of
Seminars at the Universities of St. Gallen, Innsbruck and Dortmund. Financial aid from
the Swiss National Foundation (Grant no. 5004-58524) is gratefully acknowledged. Lars P.
Feld also thanks the German Science Foundation (DFG SPP 1142) for financial support.
Appendix A
See Table A1
Table A1
Data description
Variable name Description Source
Structure of revenue Real total cantonal revenue per capita as Own calculations on the basis of the
share a share of real cantonal and local Swiss Federal Finance Administration
revenue per capita
Structure of Real total cantonal spending per capita Own calculations on the basis of the
expenditure share as a share of real cantonal and local Swiss Federal Finance and Tax
spending per capita Administration
Fiscal referendum Dummy variable ¼ 1, if a mandatory Lutz and Strohmann (1998) and
fiscal referendum exists, and zero Trechsel and Serdült (1999)
otherwise
Spending threshold Spending threshold for mandatory fiscal Lutz and Strohmann (1998) and
referendums in the case of non-recurring Trechsel and Serdült (1999)
expenditures per capita
Signature requirement Number of signatures that need to be Lutz and Strohmann (1998) and
collected for a legislative initiative per Trechsel and Serdült (1999)
capita of the electorate
Homogeneity Ratio between the real personal income Own calculations on the basis of the
of the median taxpayer compared to the Swiss Federal Tax Administration
average taxpayer
Tax competition Weighted average of the tax burdens of Own calculations on the basis of data
all other cantons for the highest income from the Swiss Federal Tax
class; weight: Inverse of geographical Administration
distance
Lump-sum grants Real federal lump-sum grants per capita Own calculations on the basis of the
Swiss Federal Finance Administration
Ratio of urban Proportion of communes having more Swiss Federal Statistical Office
population than 10,000 inhabitants
Population Cantonal population Swiss Federal Statistical Office
Fragmentation Number of communes in a canton Swiss Federal Statistical Office
Minister Number of ministers in cabinet Own calculations on the basis of data
from the cantonal governments
Coalition Number of parties in cabinet. Own calculations on the basis of data
from the cantonal governments
Cantonal income Real cantonal income per capita Swiss Federal Finance Administration
Ideology Index between 1 (right) to 5 (left) that Own calculations on the basis of data
measures the relative strength of parties from the cantonal governments
in government with reference to the
Left–Right dimension
Language Share of German speaking population Own calculations
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Appendix B. Descriptive statistics
See Tables B1 and B2
Table B1
Descriptive statistics of the variables underlying the analysis
Variables Mean Std. dev. Minimum Maximum
General revenue 67.0% 10.7% 50.5% 99.8%

User charges 47.5% 22.4% 7.4% 99.2%
Tax revenues 56.9% 13.2% 20.9% 97.7%
Tax on expenditure 97.0% 3.4% 76.1% 100%
Tax on income and property (wealth) 54.7% 14.0% 24.6% 97.9%
Tax on property (wealth) 51.4% 14.9% 18.7% 100%
Tax on income 51.1% 13.8% 26.4% 93.9%
Tax on profit 55.5% 17.7% 13.5% 100%
Tax on capital 55.1% 18.0% 19.8% 100%
Tax on inheritance 91.3% 0.2% 44.5% 100%
General expenditure 66.9% 10.8% 51.0% 99.6%
Administration 49.0% 13.1% 26.2% 94.7%
Security 75.7% 11.1% 11.0% 99.9%
Culture and recreation 34.7% 18.9% 8.0% 97.8%
Health 70.2% 24.8% 10.0% 100%
Public welfare 73.1% 15.5% 39.8% 99.7%
Education 64.2% 18.1% 50.5% 99.7%
Finance 67.1% 17.5% 17.9% 99.9%
Traffic 69.5% 13.6% 33.5% 98.7%
Economy 84.0% 12.6% 42.9% 99.9%
Environment 35.0% 20.9% 7.2% 98.9%
Fiscal referendum 0.69 0.46 0 1
Spending threshold 12.01 17.28 0 84.91
Signature requirement 0.015 0.011 0.038 0.002
Homogeneity 83.5% 7.3% 65.5% 99.7%
Tax competition 0.237 0.08 0.098 0.419
Lump-sum grants 1099 688 328 4152
Ratio of urban population 30.6% 24.4% 0.0% 99.5%
Population 258,519 271,073 12,757 1,183,568
Fragmentation 115.5 113.9 3 412
Ministers 6.39 1.22 5 9
Coalition 3.3 0.9 1 5
Ideology 3.3 0.7 2 5
Cantonal income 25.9 5.8 17.7 54.0
Language 73.1% 44.4% 0.0% 100%
Note: For a detailed description of the variables see Appendix B. All statistics are computed for 494 observations.
The statistics for revenues, expenditure and lump-sum grants are measured in real terms per capita.
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Table B2
Descriptive statistics of the main variables as they are used in the analysis
Variables Mean Std. dev. Min. Max. Obs.
Logit spending centralization

Overall 0.356 0.357 0.017 2.400 494
Between 0.357 0.067 1.857 26
Within 0.071 0.105 0.898 19
Logit revenue centralization
Overall 0.358 0.358 0.009 2.645 494
Between 0.356 0.055 1.854 26
Within 0.072 0.066 1.149 19
Logit tax revenue centralization

Overall 0.160 0.348 0.348 1.627 494
Between 0.353 0.277 1.527 26
Within 0.032 0.017 0.301 19
Fiscal referendum dummy
Overall 0.686 0.464 0 1 494
Between 0.468 0 1 26
Within 0.072 0.156 0.844 19
Spending threshold
Overall 12.012 17.283 0 84.912 494
Between 17.327 0 78.662 26
Within 3.070 7.243 24.897 19
Signature requirement
Overall 14.592 10.640 0.018 38.78 494
Between 10.575 0.027 37.543 26
Within 2.338 0.453 22.813 19
Fiscal referendum index
Overall 3.956 1.374 1 6 494
Between 1.309 1 6 26
Within 0.486 0.891 5.127 19
Homogeneity
Overall 0.835 0.073 0.655 0.997 494
Between 0.031 0.773 0.897 26
Within 0.067 0.679 0.999 19
Tax competition
Overall 24.011 2.748 18.43 28.958 494
Between 2.695 20.081 27.964 26
Within 0.746 21.483 26.405 19
Log lumpsum grants
Overall 2.400 0.145 2.115 2.886 494
Between 0.115 2.249 2.799 26
Within 0.090 2.154 2.768 19
Urbanity
Overall 0.306 0.244 0 0.995 494
Between 0.248 0 0.994 26
Within 0.020 0.124 0.392 19
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Table B2 (continued )
Variables Mean Std. dev. Min. Max. Obs.
Log population
Overall 5.180 0.483 4.106 6.073 494
Between 0.492 4.139 6.060 26
Within 0.024 5.118 5.234 19
Fragmentation
Overall 115.506 113.948 3 412 494
Between 115.910 3 408.632 26
Within 6.291 41.190 132.190 19
Ministers
Overall 6.389 1.218 5 9 494
Between 1.201 5 8.579 26
Within 0.307 4.810 7.336 19
Log income
Overall 1.404 0.086 1.248 1.732 494
Between 0.081 1.294 1.635 26
Within 0.033 1.307 1.501 19
Coalition
Overall 3.253 0.859 1 5 494
Between 0.820 1 5 26
Within 0.298 2.358 4.358 19
Ideology
Overall 3.310 0.742 2 5 494
Between 0.729 2 5 26
Within 0.198 2.415 4.257 19
Language
Overall 0.713 0.351 0.050 0.980 494
Between 0.357 0.058 0.976 26
Within 0.013 0.680 0.750 19
Share of old population

Overall 19.263 2.438 13.696 27.073 494
Between 2.366 14.939 26.154 26
Within 0.744 15.893 22.460 19
Unemployment rate
Overall 1.695 1.818 0.016 7.938 494
Between 0.779 0.509 3.080 26
Within 1.649 1.061 6.636 19
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European Economic Review 52 (2008) 611–645

On government centralization and ﬁscal referendums

JEL classification: H1; H7; D72

Keywords: Centralization; Fiscal federalism; Fiscal referendums

There is a limit to the extent of country which can advantageously be governed, or

2. The political economy of (de-)centralization: Theoretical mechanisms

Hypothesis:. Centralization of ﬁscal jurisdiction is less likely if it needs to be approved in a

3. Stylized facts about Swiss institutions

3.1. The assignment of fiscal competencies

3.2. Institutions of direct democracy

Switzerland’s considerable autonomy at the state and local level is accompanied by an

Canton Non-recurring expendituresa Recurring expendituresa Frey-Stutzer Indexb

Optional Mandatory Optional Mandatory

ZHc 2–20 20 0.2–2 2 4

4. The empirical model

RS it ¼ a2 þ b2 Rit þ g2 T it þ d2 X it þ 2it (2)

Xit ¼ vector of economic, demographic and political control variables including:

population in a canton. With regard to different political preferences we include the

5.1. Baseline regressions

Variable Expenditure I Expenditure II Revenue I Revenue II Tax revenue I Tax revenue II

Fiscal referendum dummy 0.203*** 0.161*** 0.195*** 0.156*** 0.114 0.133**

Observations 494 494 494 494 494 494

revenue centralization, we thus ﬁnd encouraging evidence supporting our hypothesis. In

L.P. Feld et al. / European Economic Review 52 (2008) 611–645

For notes see Table 2.

Variable User charges Tax on Tax on Tax on Tax on Tax on

Fiscal referendum 0.444*** 0.134** 0.085* 0.110** 0.486 0.460

For notes see Table 2.

5.2. Robustness tests

5.2.1. Cross-section and time series variation in the data

Variable Pooled Cluster Group means Cross-section Fixed effects Index

Dummy ﬁscal referendum 0.407*** 0.407*** 0.510** 0.418** 0.054 –

F-test: ﬁscal referendum – – – – 5.92*** –

Observations 494 494 494 26 494 494

Dummy ﬁscal referendum 0.404*** 0.404*** 0.506** 0.406** 0.096* –

F-test: ﬁscal referendum – – – – 5.56*** –

Observations 494 494 494 26 494 494

For notes see Table 5.

Variable Pooled Cluster Group means Cross-section Fixed effects Index

Dummy ﬁscal referendum 0.304*** 0.304*** 0.340 0.271 0.031 –

F-test: ﬁscal referendum – – – – 1.34 –

Observations 494 494 494 26 494 494

For notes see Table 5.

5.2.2. Endogeneity, omitted variables and outliers

Variable Cluster Cluster Cluster Cluster Cluster Cluster Hadi

Variable Cluster Cluster Cluster Cluster Cluster Cluster Hadi

For notes see Table 8.

Variable Cluster Cluster Cluster Cluster Cluster Cluster Hadi

For notes see Table 8.

In this paper, an empirical test is performed as to whether ﬁscal referendums prevent

Variable name Description Source

Appendix B. Descriptive statistics

See Tables B1 and B2

Variables Mean Std. dev. Minimum Maximum

General revenue 67.0% 10.7% 50.5% 99.8%

Variables Mean Std. dev. Min. Max. Obs.

Logit spending centralization

Logit tax revenue centralization

Variables Mean Std. dev. Min. Max. Obs.

Share of old population

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RS it ¼ a2 þ b2 Rit þ g2 T it þ d2 X it þ 2it (2)

Fiscal referendum dummy 0.203* 0.161* 0.195* 0.156* 0.114 0.133**

Fiscal referendum 0.444* 0.134 0.085* 0.110** 0.486 0.460

Dummy ﬁscal referendum 0.407* 0.407* 0.510 0.418 0.054 –

Dummy ﬁscal referendum 0.404* 0.404* 0.506 0.406 0.096* –

Dummy ﬁscal referendum 0.304* 0.304* 0.340 0.271 0.031 –