Fiscal Effects of the Voter Initiative Reconsidered: Addressing Endogeneity

Several recent studies have investigated the relationship between direct democracy and public policy outcomes, with mixed findings. These inconsistencies may stem, in part, from researchers' failure to recognize that direct democracy institutions are distributed nonrandomly across the American states. That is, certain factors may lead a state to adopt the initiative process and influence other policy choices. We revisit the question of how the initiative influences state fiscal policy using panel data from 1960-2000 and a full-information maximum likelihood estimator that explicitly accounts for the endogeneity of the initiative. Our findings suggest that failure to endogenize the initiative in empirical analyses leads to substantially biased estimates of its effects. In particular, we find that once factors that predict whether a state has adopted the initiative are controlled, the initiative has a positive effect on state revenue generation and spending.