Interest Groups, Referenda, and the Political Process : On the Efficiency of Direct Democracy

We argue that the institutionalization of direct democratic elements in a constitution will tend to enhance the efficiency of an economy. In a model of direct democracy it is shown that -- contrary to the political process in a representative democracy -- efficient projects will always be politically accepted and the degree of inefficiency of inefficient projects will be reduced. These effects stem from a more intense competition among small interest groups and the pressure to improve the cost-benefit ratio of a project. Furthermore, "contestable decision markets", that is the co-existence of direct and indirect forms of democracy, will always work in favor of higher efficiency