Legislative Capacity and Credit Risk

David Fortunato and Ian R Turner
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Ian R Turner: Yale University

No 4cdu8, SocArXiv from Center for Open Science

Abstract: Legislatures differ in their institutional capacity to draft and enact policy. While strong legislatures can increase the congruence of policy outcomes to the electorate's preferences, they can also inject uncertainty into markets with their ability to alter the political economic landscape. We argue that this uncertainty will manifest in a state's ability to borrow and hypothesize a negative relationship between legislative capacity and credit-worthiness. Using ratings of general obligation bonds issued by the American states over nearly two decades and data on the institutional capacity of state legislative assemblies, we find support for the claim that having a legislature that is better equipped to affect policy change increases credit risk evaluations. The results we present broaden our understanding of the importance of legislative institutions, the determinants of credit risk, and the economic implications of democratic responsiveness.

Date: 2021-09-22
New Economics Papers: this item is included in nep-fdg and nep-pol
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Persistent link: https://EconPapers.repec.org/RePEc:osf:socarx:4cdu8

DOI: 10.31219/osf.io/4cdu8

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