Contestable markets for state economic governance: Reducing the costs of democracy in United States states
The research asks what causes US states to make policies that decrease or increase the costs of democracy? The costs of democracy arise when a democratic government exploits an agency relationship and monopoly policymaking powers to provide distributive policy regimes that undermine economic performance.
A theory of state economic governance explains that the costs of democracy are a function of the partisan control of state governments that are providing distributive policy regimes under federalism. Elections and federalism create voice and exit rivalry, which means that electoral challengers or other states can credibly offer less costly policy regimes to induce the replacement of an incumbent government. Incumbent governments have incentives to match the least costly credible policy regime that a rival can offer, but need not offer in actuality. This is why the market for economic governance is contestable. The central proposition is that the least costly credible challenge is a function of replacement costs. As replacement costs increase incumbent governments can offer more costly distributive policy regimes without further risking replacement, but as costs decrease, incumbent governments reduce the costs of distributive policy regimes. More specifically, larger legislative majorities and unified governments increase voice costs, and exit costs increase as the number of states within a state-centric region decrease. As replacement costs increase, so do the costs of democracy.
The empirical analysis uses data from 1979–1996 in pooled cross-sectional time series models of bond ratings, effective tax rates and revenue forecasting errors, which are policy decisions that affect the costs of distributive policy regimes. The findings confirm the hypotheses that larger legislative majorities and unified governments increase the costs of democracy, but lower exit cost regions only affect the costs of democracy by mitigating the positive relationship between partisan control and the costs of democracy.
These findings demonstrate that both electoral competition and federalism are effective constraints on opportunistic state economic governance. A more general framework of analysis based upon contestable markets for economic governance is offered to explain economic performance at both the local and international level of analysis as a function of exit and voice rivalry.
0617: Public administration
0505: Business costs