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

Abstract

This manuscript examines the relationship between political veto points, credible commitments and regulatory compliance costs. We extend the work on credible commitments in comparative political economy and apply this framework to environmental compliance costs in the American states. Our central purpose is to assess whether different types of political veto points credibly constrain regulatory change, and thus lower compliance costs. We conceptualize veto points broadly, including legislative oversight, gubernatorial powers, and direct democracy. We analyze state-level environmental regulatory compliance costs from 1988 to 1994 as a function of the structure of state political institutions and state political and economic characteristics. Our results suggest that a key veto point, the authority for legislators to review bureaucratic behavior, consistently reduces compliance costs. In comparison, citizen initiatives, gubernatorial powers, and stringent discharge rules do not systematically influence compliance costs.

Keywords: Credible commitment, regulatory compliance costs, environmental policy

JEL Classification: Q28, H11, K32