Taking the Initiative! Direct Democracy, Coalition Governments, and Welfare State Expansion

Direct democratic rights are increasingly adopted around the world. However, what are the consequences of the introduction of initiative and referendum rights for welfare state development? The existing literature holds a pessimistic view on the role of direct democracy for welfare state development and generosity. Whereas referendums are argued to constitute a major roadblock to the extension of social expenditure, the link between initiatives and social security provision is unclear. I contribute to the existing literature by arguing that the effect of direct democratic instruments on welfare state extension is systematically related to the political environment. More precisely, I contend that governments with a few parties deviate from the median voter preference by providing insufficient social expenditure, whereas the opposite is true in settings with many governing parties. In both cases, voters employ direct legislation to correct for the spending behaviour of governments. Using time-series cross-sectional data on social expenditure in the Swiss cantons from 1930 to 2000, I show that initiatives and referendums constrain social expenditure growth in settings with many governing parties, but expand it when a few parties are in government.