Academic journal article Political Research Quarterly

Checks, Balances, and the Cost of Regulation: Evidence from the American States

Academic journal article Political Research Quarterly

Checks, Balances, and the Cost of Regulation: Evidence from the American States

Article excerpt

This article examines the relationship between political veto points, credible commitments, and regulatory compliance costs. Its central purpose is to assess whether different types of political veto points credibly constrain regulatory change and thus lower compliance costs. The authors conceptualize veto points broadly, including legislative oversight, gubernatorial powers, and direct democracy. We analyze state-level environmental compliance costs from 1988 to 1994 as a function of the structure of state political institutions and state political and economic characteristics. The results suggest that a key veto point, the authority for legislators to review bureaucratic behavior, consistently reduces compliance costs.

Keywords: veto points; credible commitment; environmental regulation; compliance costs; bureaucracy

Policy stability, and the factors that promote it, has long been of interest to political scientists. Recent studies have documented the role of veto players in determining policy stability. For example, Tsebelis (1995, 2002) argued that political systems are distinguished by the extent to which political actors have veto power over policy choices; increasing the number of veto players (or their ideological distance from one another) increases policy stability by preventing dramatic policy change. The phenomenon has been observed formally and empirically (e.g., Tsebelis 1999; Tsebelis and Money 1997), and others have documented the effect of veto points on political expenditures and budgeting (Bawn 1999; Crepaz and Moser 2004), legislative output (Kreppel 1997), the redistributive capacity of the state (Crepaz 2001), tax policy (Hallerberg and Basinger 1998), and income inequality (Birchfield and Crepaz 1998).

Keefer and Stasavage (2003) conceptualized a broader impact of veto points, seeing an expression of their effect not only in terms of policy stability, but also on credibility. Credible commitment on the part of the government is central to the long-run performance of a nation's economy (North and Weingast 1989; Stasavage 2003). If commitments cannot be made (e.g., to follow a set of rules tomorrow that exist today), citizens will be unwilling to rely upon policy for making contractual, investment, or other types of economic decisions. For example, in the case of central bank independence, the choice to delegate, when there are multiple veto points, gives banks greater flexibility to reduce the bias of politicians toward adopting inflationary policies that lower longrun economic performance (see also Woolley 1993).

The effect of credible commitments goes beyond central banks and monetary policy because the underlying purpose of the commitment is to ensure that economic decision makers can depend on policies being stable over time. However, the empirical connection between veto points as stabilizers of policy and the utility of veto points as a credible commitment by government (where that commitment is meant to support economic performance) is at best tenuous. Most recent studies have been limited to assessing the importance of veto points in the case of central banking even though theoretical models conceive of this commitment much more broadly (Keefer and Stasavage 2003). Therefore, it remains unclear if veto points and credible commitments that work effectively in monetary policy translate to other policy domains. This research provides an empirical test of veto points and credible commitments in an alternative policy domain, environmental compliance costs in the United States.

Following Tsebelis (1995, 2002), we argue that institutions can be compared by examining how veto points establish and promote credibility. We examine the proposition that as political actors have more opportunities to engage veto points in a political system, policy stability is increased, and this results in reduced environmental compliance costs at the firm level. Veto points are a mechanism for ensuring policy stability (Keefer and Stasavage 2003) because they serve as credible commitments on the part of the government and they shape the behavior and performance of economic actors (see North 1990; Qian and Weingast 1997; Stasavage 2002; Weingast 1995). …

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