The determination of local public expenditures and the principal and agent relation: A case study

The principal and agent relationship is important in the public sector. There, elected or appointed representatives act on behalf of the citizens of their jurisdictions. This paper examines the importance of the budget referendum, which allows the principals to approve or disapprove the proposal of a set of agents, in the context of local public expenditure decisions. We test the null hypothesis that the institution of referendum, when compared to a nonreferendum institution, does not lead to significantly different expenditure behavior.