Direct democracy and local government efficiency

•We study the role of direct democracy in the efficiency of public good provision.•The sample consists of the municipalities of German State of Bavaria in the 2000s.•Efficiency is assessed by non-parametric estimates of local input/output data.•We find positive link between binding citizen-initiatives and government efficiency.

This paper studies the role of direct democracy in ensuring efficient and cost-effective provision of goods and services in the public sector. The sample consists of the population of municipalities in the German State of Bavaria, where in the mid-1990s considerable direct democratic reforms granted citizens wide opportunities to directly participate in local affairs through binding initiatives. Using information on the municipal resources and the municipal provision of public goods, and applying a fully non-parametric approach to estimate local government overall efficiency, the analysis shows that more direct democratic activity is associated with higher government efficiency. This result suggests that more inclusive governance through direct decision-making mechanisms may induce more accountable and less inefficient governments.