The impact of legislative institutions on public policy: a survey

European Journal of Political Economy Vol. 15 Ž1999. 1–33

The impact of legislative institutions on public policy: a survey Peter Moser

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Hochschule f ur ¨ Wirtschaft und Tourismus Chur and UniÕersity of St. Gallen, Comercialstrasse 24, CH-7000 Chur, Switzerland Received 1 June 1997; revised 1 May 1998; accepted 1 June 1998

Abstract This paper surveys the application of spatial models for the analysis of economic policy decisions. Three topics are reviewed: the first is how the structure of the decision-making process contributes to stable and consistent policy choices. Both aspects are decisive prerequisites for the functioning of a market economy. Second, a review of the literature on US and European Union ŽEU. policy choices reveals how decision rules are decisive in predicting these choices. Third, a literature on the structure of legislative decision-making shows how the understanding of bureaucratic behavior is enhanced by the analysis of the rules which determine delegated discretion. q 1999 Elsevier Science B.V. All rights reserved. JEL classification: D7 Keywords: Positive political economy; Structure-induced equilibrium; Regulatory behavior

1. Introduction In democracies, a majority of the people determines policy either by directly voting on issues or indirectly by choosing their representatives. Democratic mechanisms serve to limit the divergence between the actions of political officials and the preferences of the people. Yet these mechanisms come at a cost. Democracies are limited in providing durable policies, because today’s voters )

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cannot bind future ones, and secondly, because in many circumstances, no policy commands a majority against all other possible proposals. In principle, a majority can change public policies, and has an incentive to do so if it faces time-inconsistent constraints ŽKydland and Prescott, 1977. – for example, when a tax base is elastic ex ante but becomes completely inelastic ex post, as for a levy on accumulated capital ŽFischer, 1980. – or if today’s majority has different preferences than the majority that enacted the status quo. Also, if a policy choice comprises more than one issue, there exists almost always a proposal that can defeat the status quo which makes coalitions vulnerable and changes likely ŽCondorcet, 1785; McKelvey, 1976; Schofield, 1978.. This potential for change contrasts with the requirement of a market economy, that there be well-defined and stable property rights. The state’s role is to define and enforce these rights. Individuals who perceive that property rights once created are respected and enforced by the state, will be more inclined to make investments. If however rights are viewed as insecure, for example because of the fear of substantial tax increases or outright confiscation of property, expected private returns from investments are lower, which reduces growth of the economy. Perceived insecurity of property rights and time-inconsistent policies thus, impede development, and can result in a no-growth equilibrium trap in which a society cannot alter the status quo, despite radical changes in announced policy ŽWeingast, 1995.. 1 Beginning from the proposition that decisions taken by majority rule are generally unstable and are not binding for future voters, and so are insufficient for the required security of a private market economy, the common thesis of the literature reviewed in Section 2 is that political institutions provide the sought sources of stability. Political institutions are defined as constraints on simple majority rules, and include Ži. rules of the political game set at the constitutional level, Žii. the organizational structure of legislatures, and Žiii. administrative and judicial procedures. Such institutions shape the incentives faced by political actors, by restricting the type of policy comparison via agenda setting rights and other procedural rules, by granting partial or complete veto possibilities, and by influencing the distribution of information. An appropriate configuration of institutions can lead to a stable policy choice that cannot be replaced by any other policy proposal. For this type of equilibrium, Shepsle Ž1979. introduced the term structure-induced equilibrium ŽSIE.. The existence of a SIE implies that different institutional arrangements give rise to different policies. In other words, public policies depend not only on the 1 For example, Svensson Ž1998. in a cross-country analysis of 101 countries found that governments in unstable and polarized political systems tend to invest little in the legal infrastructure, resulting in lower levels of domestic investment. Also, Rodrik Ž1989. points out that the success of policy reform may depend in no small part on the private sector’s expectation of policy reversal. The dilemma is apparent in the democracies of Eastern Europe, as well as in many developing countries.

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preferences of constituencies, but also on political institutions. An analysis of these institutions seeks to reveal the properties of the supply function of political actions and thereby complements the interest group approach to politics Žsee the surveys by Potters and Sloof, 1996 and Potters and van Winden, 1996.. Because some interest groups are more likely to form than others, a fundamental bias arises in the demand for public policy. For example, this is reflected in protectionist international trade policy Žsee the survey by Hillman, 1989.. In the interest group approach, such demand for self-interested policy is simply translated into political outcomes. The same is the case implicitly in the rent-seeking literature which looks at how resources are used to influence potential allocation Žsee the survey by Nitzan, 1994.. The interest group and rent-seeking cannot readily be applied to explain the often discontinuous changes in public policies. The literature reviewed in Section 3 claims that legislative and other political institutions can explain which coalition of groups are more likely to succeed in having their sought policies implemented, how groups maintain their benefits over time Žby shaping institutions in order to affect the choices in the future., and why policy changes occur at some particular times and not at others. A third line of research, reviewed in Section 4, focuses on the implications of stability-enhancing institutions for regulatory behavior. In situations in which an agency or bureaucracy interprets and executes a statute, the individuals within the agency or bureaucracy are in effect permitted to make the first policy choice. This policy prevails unless preempted by legislative action. Whenever legislative structures induce stability, that is, whenever legislative equilibria exist, the agency can take advantage of this and select its most preferred policy from within the set of stable outcomes. Consequently, the magnitude of agency discretion depends not only on informational advantages but also on legislative institutions, including decision rules and party organizations. 2

2. Legislative institutions and stability The formal analysis of institutions which began in the late ’70s and early ’80s was to a large extent a reaction to the result of the instability property of pure majority rules established by social choice-theory. In the context of spatial models with individuals making decisions by pairwise comparison using the simple majority rule, an equilibrium almost never exists if the choice space comprises two or more dimensions. Then, if no equilibrium exists, pairwise comparison leads to a cycle. With spatial preferences, the cycling is not constrained but global, as 2 In the work of Moser Ž1999., I discuss these subjects in more detail and provide applications to decision-making in the EU, in Switzerland, and with respect to the choice of central bank independence.

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McKelvey Ž1976. formally established for two dimensions, and as generalized to any non-unanimous voting rule by McKelvey and Schofield Ž1986.. The global cycling theorem implies that anything can happen under majority rule. With no equilibrium, there exists an agenda that will lead sincere voters to any outcome. If voters’ behavior is sophisticated or forward-looking, under certain agendas, cycling is constrained to the uncoÕered set of the initial point q. Roughly defined, the uncovered set of q consists of the points that defeat q either directly or indirectly by defeating a point that defeats q directly ŽMiller, 1980; Shepsle and Weingast, 1984; Cox, 1987; Ordeshook and Schwartz, 1987.. The uncovered set is centrally located ŽMcKelvey, 1986. such that the outcome will not be at extreme positions. 3 More recently, a different and additional source of instability was discovered in models of collective decision-making which focus on the dynamic inconsistency of preferences for policy outcomes from one period to the next ŽGlazer, 1989; Persson and Svensson, 1989; Alesina and Tabellini, 1990; Tabellini and Alesina, 1990; Gersbach, 1993; Glazer, 1993; for empirical evidence see Crain and Tollison, 1993.. These models focus on the choice of one policy issue but comprise two or more periods. Instability occurs because the current median voter is uncertain whether he or she will be the median voter in the next period, or because the current government has only a limited probability of being reelected in the future. Consequently, today’s policies are vulnerable to reversals tomorrow. The inability of present-period decision-makers to write a binding contract with the decision-maker in the next period is the basic problem in these analyses. This review focuses on the first source of instability, although the second cause of instability can be interpreted as a special case of a multidimensional choice, namely involving policy choices at different time periods. I proceed as follows: first, I define the instability issue and the concept of the structure-induced equilibrium. Second, I discuss the contribution of constraints on majority rule decisions to stability and their relevance in legislative institutions. 2.1. Instability and structure-induced equilibrium (SIE) In a spatial setting, the objects of choice are represented as points in a multidimensional space. This is illustrated with the following example: suppose that a legislature has to decide how much money to appropriate for public transportation and for the construction of new roads, which simultaneously determines taxes. This choice implies a two-dimensional policy space X, X ; R m m s 2, as in Fig. 1, where x 1 and x 2 denote the two dimensions. Consequently, any point x s Ž x 1 , x 2 . on the plane is a potential legislative choice. Each 3

Related is the concept of the heart, introduced by Schofield Ž1993.; see also Schofield Ž1995..

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Fig. 1. Global cycling in two-dimensional space.

legislator has a strictly quasi-concave utility function over X, U i Ž x ., with an ideal point in the space, denoted as x i s Ž x i1 , x i2 ., that is U i Ž x i . ) U i Ž x . ; x / x i . The ideal points of the three legislators A, B, and C are depicted in Fig. 1 as x A , x B and x C , respectively. These points represent the legislators’ most preferred combination of spending and implied taxes. Utility declines with distance from the ideal point. Unless otherwise specified, the arguments which follow are not affected by assuming separable preferences and equal weights. With such assumptions, each legislator is indifferent among spending combinations that are an equal distance from his or her ideal point and the indifference curves are circles. Such indifference curves through the status quo Ž q . are drawn in Fig. 1. The points inside these indifference curves are each legislator’s preferred-to set, defined as the set of alternatives strictly preferred by legislator i to q, Pi Ž q . s  x g X < U i Ž x . ) U i Ž q .4 . The contract curve is the locus of tangents of the indifference curves of two legislators and corresponds to the Pareto-optimal points for those two persons. Since indifference curves are circles in Fig. 1, the contract curves are straight lines connecting two ideal points, for example x A x C . To illustrate the instability of majority rule decisions, consider the three shaded petals in Fig. 1, which are the set of policy alternatives that are preferred by a majority of the decision-makers to the status quo q. This set of points is called the win set of q, and is defined as W Ž q . s  y g X < yPi x < G < xPj y <4 where < yPi x < is the number of legislators who prefer y to x. Notice that any point in the win set is dominated by some other points in the space. Except for very special circumstances, the win set is non-empty w W Ž x . / B, ; x g X x for any point x in the

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choice space X, which defines the instability of pure majority rules ŽMcKelvey, 1976; Schofield, 1978.. Different approaches have been used to search for equilibria in pure majority rule decisions. 4 One avenue has been to search for a preference-induced equilibrium by either restricting the dimensions or the distribution of preferences ŽPlott, 1967; Inada, 1969; Sen, 1970; Caplin and Nalebuff, 1988., or by introducing uncertainty about the positions of proposals Žsee Enelow and Hinich, 1984. or about the positions of voters Žas in the probabilistic voting models; see Coughlin, 1992 and the critique by Kirchgassner, 1996.. The other avenue is to analyze ¨ institutional constraints in specific majority voting situations and to determine which influences lead to stability and can be used to predict the outcome. This is the approach taken by Shepsle Ž1979. in his structure-induced equilibrium ŽSIE.. The equilibrium concept of the SIE is that of a stable policy which cannot be defeated by the application of the given decision rule. In terms of cooperative game theory, points belonging to the SIE are also points in the core. However, the focus of the SIE is on institutional features that render a policy stable. For example, a median in all directions ŽPlott, 1967. is in the core but not in the SIE, because the stability of this point is not induced by constraints on the majority rule. Furthermore, the concept of the SIE can and has been used in non-cooperative game theory Žearly contributions are by Baron and Ferejohn, 1989a,b; Weingast, 1989a.. A status quo is a SIE if ‘taking no action’ is the optimal ŽNash. strategy for all players. 2.2. The effects of constraints on majority rule decisions I now turn to discuss the effects of a predetermined voting sequence, the requirement that each issue dimension has to be considered separately and by the allocation of precisely defined proposal and veto rights. 2.2.1. Voting sequence The model which produces global cycling assumes that the agenda is built forward; the status quo is voted on first and the most recent proposal is voted on last. Most existing legislatures embody agenda mechanisms that are constructed backward. Alternatives are voted on in the reversed order in which they are placed on the agenda and the status quo is voted on last. An agenda built backward is more constraining than an agenda built forward ŽShepsle and Weingast, 1984, p. 71.. The winning alternative must defeat q in the last vote, therefore, it must be in the win set of q, W Ž q ..

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An extensive survey is by Schofield Ž1995..

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2.2.2. Issue-by-issue Õoting Members of a decision body who consider complex matters, often simplify the discussion by breaking issues into subparts, debating each part separately from the others. Thereafter, germaneness rule permits discussion only on the specific issues and precludes the introduction of new ones that the members might consider simultaneously. Such a procedure builds the basis for the analysis of Congressional committees by Shepsle Ž1979., and of cabinet governments by Laver and Shepsle Ž1990.. With separable preferences, issue-by-issue voting induces single peaked preferences on each dimension, and the median voter theorem applies. The equilibrium outcome is at the issue-by-issue median, defined as the median point on each issue even if issues can be reconsidered and the voting order be changed. Sophisticated behavior does not alter this result as long as preferences are separable ŽKramer, 1972.. However, with nonseparable preferences and forward-looking behavior, an equilibrium may not exist although an equilibrium is more likely with issue-by-issue voting than under an unconstrained majority rule Žsee Ordeshook, 1986, pp. 263–266.. 2.2.3. Proposal rights The right to make proposals is usually not equally distributed among legislators. The committees in the US Congress and the Commission of the European Union ŽEU. are examples of decision bodies endowed with particular proposal rights. Congressional committees can, to some extent block legislation, and amendments to their proposals are often severely limited. In the EU, proposals can be made only by the Commission and its proposal can be amended by the Council of Ministers by unanimity while the approval of an unchanged proposal requires only the support of a qualified majority. In general, proposal rights include two attributes: first, the right to block any proposals and thereby to maintain the status quo Žgatekeeping right., and second, the degree of competition in making proposals. A monopoly right exists if only one decision-maker and nobody else is recognized to make proposals. This corresponds to situations in which a proposal by the executive or by a legislative committee is considered under a closed rule in the legislature. The other extreme is complete competition, that is, any person in the legislature can make proposals Ž complete open rule .. In reality, even if many persons are recognized to make proposals, the procedures may treat certain proposal preferentially. Subtle procedural advantages in the US Congress are documented by Weingast Ž1989b.. Since the results differ depending on the number of policy dimensions, I discuss the effects of agenda rights, first for one-dimensional and then for two-dimensional choices. If policy choice is constrained to a single dimension, the median voter theorem applies and the SIE is the ideal point of the median legislator. However, the allocation of agenda rights can increase the size of the SIE.

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Fig. 2 illustrates the effects of agenda control for one-dimensional choices. x M and x A represent the ideal points of the median voter and of the agenda setter, respectively, q the status quo, and x M Ž q . the point on the policy line where the median voter is indifferent to q. Hence, all points in the interval Ž q, x M Ž q .. defeat q, and, therefore, are elements of the win set W Ž q .. The agenda setter A is indifferent between the median point x M and x AŽ x M ., and between q and x AŽ q .. Without gatekeeping rights and if any amendments along the policy dimension X are allowed Žcomplete open rule., the outcome is the median point x M . The size of the SIE increases if either closed rule or gatekeeping rights, or both, are introduced. Under the closed rule assumption, and independent of the existence of gatekeeping rights, the agenda setter can make a credible take-it-or-leave-it offer relative to the status quo or reversion point and no amendments are possible. In this model, first analyzed by Romer and Rosenthal Ž1978., the SIE comprises all points in the interval Ž x M , x A ., since the agenda setter cannot move policy closer to his or her ideal point, and therefore, will make no proposal. If the agenda setter can be compelled to make a proposal, he or she will propose the status quo and no policy change occurs. If the status quo q is not in the SIE, the agenda setter makes a proposal such as to maximize his or her utility. In other words, the agenda setter chooses his or her most preferred position in W Ž q . which is x M Ž q . in Fig. 2. The gatekeeping right is greatest if the gatekeeping right is combined with an open rule, as shown by Denzau and Mackay Ž1983.. If the agenda setter makes any proposal, the voting outcome is the median point x M . Hence, the agenda setter will only make a proposal if he or she prefers x M to q, otherwise he or she will keep the gates closed. Consequently, the SIE under open rule and gatekeeping power is the set of points in the interval Ž x M , x AŽ x M ... The absence of an equilibrium in more than one dimension is responsible for the different effects of proposal rights. In addition to the assumptions that voters are sophisticated, and that the status quo is voted on last, I follow Weingast Ž1989a. in supposing that the proposal of the agenda setter is voted on second-tolast. Fig. 3 illustrates a situation with three legislators and their ideal points Ž x A , x B and x C .. Person A has again the proposal rights. As in the one-dimensional situation, the influence due to proposal rights is absent if the agenda setter can be

Fig. 2. Agenda setting in one-dimensional choices.

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Fig. 3. Agenda setting in two-dimensional choices.

compelled to make a proposal and any member can make proposals. In this case, the outcome can be anywhere in W Ž q ., and, in contrast to one-dimensional choices, no SIE exists. 5 Under a closed rule, and independent of a gatekeeping right, the SIE comprises only the ideal point of the proposer Ž x A .. If the status quo is not at x A , the proposer can always make a successful proposal and increase utility. The optimal strategy is to propose the most preferred point in W Ž q .. In Fig. 3, this is the ideal point. If amendments are possible, the size of the SIE increases dramatically. Even if only one amendment is allowed, the agenda setter can no longer be certain of improve upon the status quo in the situation depicted in Fig. 3. Suppose that she proposes y. With the assumed voting sequence, any successful amendment z must defeat both q and y, that is z g W Ž q . l W Ž y .. In general, this is not a very restrictive condition, as Fig. 3 suggests: it leaves a large number of opportunities for amendments that benefit other voters at the cost of the agenda setter. Thus, any point in the shaded region, like z 1 , could result. If the proposer has the right to keep the gate closed, she has an ex ante veto and can only defend the status quo. Since it is difficult to predict the outcome once she has made a proposal Žno SIE exists., she has an incentive to keep the gates closed even if q is far from her ideal point, if the agenda setter is risk averse and cannot make binding agreements with other members in the legislature. In general, the agenda setter will only make a 5

Baron and Ferejohn Ž1989a,b. have developed a bargaining model which suggests that even under an open rule, the proposer reaps disproportionate distributional benefits in equilibrium. There are two sources of the proposal power. First, impatience and, second, the procedural assumption that a majority can end the debate.

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proposal Ž y . if it increases her utility and makes it impossible for B and C to build a coalition and choose a point that defeats q and y and makes A worse off than at q. 6 Obviously, there is a severe commitment problem in such situations: potentially, all three legislators can be made better off if they could enter enforceable agreements. However, even if A and B credibly agree to choose policy z 2 , there remains the enforcement problem, because A can always renege and subsequently enter a coalition with C. To render reneging impossible, A can partially give up the proposal rights. Assume that A transfers the proposal right along dimension x 2 to B and keeps only his or her rights along dimension x 1. Such a bargain could be institutionalized within a committee system, with two committees having different jurisdictions and dominated by legislators with different preferences. Such a structure of the decision-making enforces z 2 : the only possible changes along x 1 are to the disadvantage of the responsible gatekeeper A and are therefore blocked, and changes along x 2 are impossible because B cannot find the support of a majority to improve the situation. 2.2.4. Veto rights As revealed in the case of ex post veto by the agenda setter, granting veto powers to several players increases the size of the SIE. Veto institutions are widespread in collective decision-making. For example, Money and Tsebelis Ž1992. report that out of 187 territories surveyed by the 1989 Europa World Yearbook, 54 have bicameral legislatures Žp. 31.. Federal states have almost always, and unitary states have sometimes, two chambers Žsee Herman, 1976, p. 4.. Furthermore, not only parliamentary chambers act as legislative decisionmakers. Such a function can also be allocated to voters Žas in the case of a popular referendum., to the executive Žas in the case of an executive veto which may be overridden only by a qualified majority or not at all., or even to a constitutional court Žif the court has the right to review the constitutionality of a legislative act.. In addition, parties in a government coalition can act as veto players. 7 The impact of the veto rights in the US legislative decision-making on the size of the SIE has been analyzed in two dimensions by Carter and Schap Ž1987., Hammond and Miller Ž1987., and extended by Hammond and Knott Ž1996., and for one-dimensional choices by Ferejohn and Shipan Ž1990.. These studies produced conditions for the existence of a SIE, and demonstrated that if an SIE exists in the bicameral interaction, its size can increase with the presidential veto 6

Formally, the proposal y must be in PAŽ q .lW Ž q . must make B or C better off than a point in P B Ž q .l PC Ž q .l PB Ž y .l PC Ž y .. The size of the SIE in situations such as in Fig. 3 has not been determined in the literature. Related is the approach by Hammond and Knott Ž1996.. 7 The importance of bicameralism in creating checks and balances has long been recognized, starting with Montesquieu Ž1748. and Federalist Papers ŽMadison et al., 1788, particularly in No. 51.. See the survey by Tsebelis and Money Ž1997., Chap. 1.

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Fig. 4. Individual veto players and stability.

including the override possibility. 8 An increasing effect on the size of the SIE can also be expected from the combination of bicameral decision-making with a referenda by the voters, as in Switzerland Žsee Moser, 1996b.. As Cox and McKelvey Ž1984. and Tsebelis Ž1995. have proved more generally, policy stability increases with the number of veto players, the more different are their policy positions Žlack of congruence., and the smaller the difference within the group which constitutes a veto player Žcohesion.. Following Tsebelis, the argument is illustrated in Fig. 4, which depicts the ideal points of three players, x A , x B and x C and a status quo q in a two-dimensional context. If for example A and B are veto players Žthat is, they have to approve any decisions., than only a point inside the win set of player A and B, WAB Ž q . will be chosen. If in addition A and B can make amendments, then only points in WAB Ž q . that are on their contract curve Žthe line x A x B . will be the outcome of the decision Žpoints between Õ and u.. If the status quo is on x A x B , no policy change is possible. Hence, the SIE comprises the line between x A and x B . If player C is also a veto player, then any points inside the triangle x A x B x C are elements of the SIE and no change is possible. The SIE comprises a larger area, not only the more veto players there are, but also the more different are their policy positions. The contract curve x A x B

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An SIE is unlikely to exist in more than two dimensions. However, Tsebelis and Money Ž1997. prove that an uncovered set of a bicameral legislature always exists ŽChap. 3..

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or the triangle x A x B x C expands, the more dispersed are the ideal points of these players. 9 This section suggests that the structure of the decision-making process is of particular importance. Voting sequence, the breaking of complex matters into subparts, the allocation of agenda control, and the extent of agenda rights, as well as the distribution of veto rights, contribute to stable and consistent policy choices, and thereby overcome the instability of pure or unconstrained majority rule-decisions. Furthermore, and more important for applied work, the structure of a decision process is decisive in predicting policy choices. This allows us to evaluate decision rules and to compare different decision structures.

3. Legislative institutions and policy choices While there is a growing consent that institutions, including legislative decision rules, matter, there is an ongoing debate about the relative influence of the various players in policy decisions. This issue has been discussed most intensely with respect to legislative decision-making in the United States, which I discuss first. Second, I highlight the results of recent research in this tradition on the decisionmaking in the EU. Third, I present how the distribution of the ministerial portfolios in coalition governments influences policy choices. Finally, I review the impact of referenda on policy variables. 10 3.1. LegislatiÕe decisions in the United States The concept of the SIE offered a new way to analyze structures and procedures in real world legislatures and a large number of studies were produced. A main focus has been on the US Congress, with its dominating committee system and its weak parties. The main dispute is the following: are the most decisive players Congressional committees Žas argued by Shepsle and Weingast, 1987a and Weingast and Marshall, 1988., the median voter in Congress ŽKrehbiel, 1991., parties ŽCox and McCubbins, 1993., or the President ŽMoe, 1985.? Whatever the relative contributions of these arrangements, the empirical study of Stratmann Ž1996. indicates the absence of cycling and unstable coalitions in the US Congress. The theoretical foundations of the influence of Congressional committees are controversial Žsee Krehbiel, 1991; the discussion between Krehbiel, 1987 and 9

If veto players A, B and C are groups of persons, then, in contrast to the case with individual veto players, q can be beaten but only by points inside a centrally located area. As Tsebelis Ž1995. shows, if the preferences within the veto players are similar or symmetrically located around the center, then the size of the win set becomes small, therefore raising stability. 10 For excellent and in depths studies of the impact of parliamentary structures on legislative Ž1995.. outcomes in West European countries, see the contributions of Doring ¨

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Shepsle and Weingast, 1987b, and Shepsle and Weingast, 1994; Gilligan and Krehbiel, 1994.. There is nonetheless substantial evidence that committee members in the US Congress receive a disproportional share of the benefits from their committees Žsee the survey by Weingast and Marshall, 1988, pp. 152–155.. Committee membership influences the geographical allocation of pork barrel projects, 11 the distribution of antitrust suits, and also the pattern of campaign donations by firms. The classical study is Ferejohn Ž1974. which documents the number of new projects started in each state as a function of committee membership. In addition, since committees retain a veto right over policy change, policies are partially insulated from small changes in legislators preferences. A sufficient condition for policy change is that there be a substantial turnover in committee membership, so that the new members of the committee have preferences which differ from those of their predecessors. Several studies have confirmed this argument, and have shown that a large swing in committee preferences leads to large swings in policy. For examples, Weingast and Moran Ž1983. argue that the abandonment of the aggressive consumer activist policies by the Federal Trade Commission in 1980 was due to turnover in the membership of the responsible committee. A similar explanation is put forward by Weingast Ž1981. to explain airline deregulation, and by Weingast Ž1984. to explain the deregulation of the New York Stock Exchange. On the same theme, in the work of Moser Ž1990., I show that the substantial change in US trade policy with the delegation of trade policy making to the President in the Reciprocal Trade Agreement Act in 1934 was preceded by a substantial turnover in the Senate Finance Committee ŽChap. 8.. Finally, knowledge regarding which interests are represented in relevant committees enhances the predictive power of the economic theory of regulation, particularly if there are more than two interest groups. Gilligan et al. Ž1989. use such information in their study on the inception of the Interstate Commerce Commission. They argue that because the railroads dominated the Senate committee and the shorthaul shippers dominated the corresponding committee in the House of Representatives, these two groups benefitted from the regulation at the expense of the longhaul shippers which were not represented in these committees. Ferejohn Ž1986. shows in his study of food stamp legislation how two interest groups Žfarmers and those interested in welfare programs. can institutionalize logrolling relationships via the control of the relevant committees. The influence of the Congressional committees is however not unlimited. This has been pointed out most thoroughly by Krehbiel Ž1991. and by Cox and McCubbins Ž1993.. Krehbiel and Rivers Ž1988. found that the Senate Labor and

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Pork barrel refers to projects in which the benefits occur to a small region while the costs are distributed among a much larger population.

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Human Resource committee gave in to the Senate’s median voter’s wishes on minimum wage legislation in 1977. In other words, the other players in legislative decision-making can influence policy choices. Until recently, less attention was paid to the contribution of political parties to improving vote trading among legislators. 12 Political parties, like firms, can build reputations different from those of their individual members. To the extent that they can influence the behavior of their members, parties provide an alternative means of enforcing agreements. Referring back to Fig. 3, suppose legislators A and B are members of the same party. A strong party leadership may be sufficient to enforce policy z 2 , which is a mutually beneficial policy compared to q for both party members. Cox and McCubbins Ž1993. develop a theory of party formation based on party reputation and discuss collective mechanisms that are designed to prevent shirking. 13 For the US Congress, Cox and McCubbins claim that committee jurisdiction, assignments to committees, and floor deliberations are under party control Žsee also Rhode, 1994.. Cox and McCubbins provide a large body of empirical evidence. For example, they show that party leaders use their appointment power to advance those members in the committees that are more loyal to the party leadership, that is, whose vote are more in accordance with the party leadership Žsee also Crain, 1990.. As a consequence, their empirical test based on roll call votes shows that committees which affect all members tend be representative of the party median Žor leadership., while in those committees with a more narrow jurisdiction, party considerations are less constraining on self selection, and preference outliers are possible. 14 Crain et al. Ž1990. report that parties control the allocation of political benefits to their members, such that less electorally vulnerable members are more successful in having their sponsored bills passed. Parties and committee systems are complementary enforcement mechanisms which may support each other. The argument of Cox and McCubbins adds important insights to the role of parties in organizing coalitions to support legislation, in keeping deals intact in the deliberations on the floor, and in preempting potential damage to parties’ reputation from uncoordinated individual optimization. 15 There are only a few empirical studies which analyze the impact

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The lack of interest probably reflected the declining influence of parties in US politics up to the 1970s Žsee Brady et al., 1979.. 13 See also Rhode Ž1991. and on function of leadership in general, Calvert Ž1992.. 14 In contrast, Krehbiel Ž1993. could not find a significant influence of parties after controlling for preferences. But there is a problem of causality: representatives with substantially different preferences usually belong to different parties. For a more general critique of the use of roll call votes, see Hall and Grofman Ž1990., Snyder Ž1992. and Londregan and Snyder Ž1994.. 15 This approach is particularly successful in countries with a strong party system. The investigation of Ramseyer and Rosenbluth Ž1993. of the Japanese political system is a good illustration of how a majority party can control the behavior of its members, and also the bureaucracy and the courts.

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of party dominance on policy choices. An important exception is Kiewiet and McCubbins Ž1991., who show that the partisan composition of the US Congress is a key determinant of how funds are allocated to the countless programs and agencies of the federal government. Analyses of US legislation are incomplete without taking into account presidential veto rights and the subsequent possibility of an override by a two-third majority in both houses of Congress. These checks and balances increase stability or the size of the SIE Žsee Carter and Schap, 1987; Hammond and Miller, 1987; Krehbiel, 1996.. The relative impact of these institutional actors is shaped by subtle procedural rules Žsee Dearden and Schap, 1994., by the use of commitment devices ŽIngberman and Yao, 1991., by partial transmission of information by presidential rhetoric ŽMatthews, 1989. to reap advantages in these bargaining situations, and by presidential proposals serving as a focal point for legislative activity ŽMiller, 1993.. The few systematic empirical studies which attempt to measure the extent of presidential influence find a surprisingly small impact of the president. Kiewiet and McCubbins Ž1988. report that from 1948 to 1985 only 6% of the appropriations requested by the president for agency budgets were approved by Congress in an unaltered form. Furthermore, as expected from the logic of the veto right, the president has much greater influence on congressional appropriations when he or she prefers to spend less than Congress rather than more. Surprisingly, the president still has some influence when he or she prefers more than the congressional choice. In contrast, the study of McCarty and Poole Ž1995. based on the NOMINATE procedure of Poole and Rosenthal Ž1985. indicates that Congress accommodates less than the agenda control models predict, and that public commitments are ineffective while partisan support of the president in Congress is favorable for the president. The conclusions from this literature on US legislative decisions are that the different institutions complement each other and that applied research is needed to identify the detailed characteristics of particular institutions. A good example of the relevance of the interaction of various institutions is the investigation of Alt and Lowry Ž1994. of fiscal policy by American state governments. Alt and Lowry report that fiscal policy Žexpenditures, budget deficit. is influenced by constitutional constraints Žbalanced budget requirements. and by the majority party, and that it matters whether both legislative chambers are controlled by the same party or whether party control is divided. 3.2. LegislatiÕe decisions in the European Union Empirical research on the impact of the legislative structure of the EU on public policy is still limited. 16 One much disputed issue has led to some institutionally 16

For a first collection of public Žor rational. choice-based analyses of decision-making in the EU, see Moser et al. Ž1999., and the survey by Moser and Schneider Ž1997..

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related research. This is the question of the relative influence of the different decision-makers ŽCouncil, Commission and Parliament.. In accordance with the traditional view, Steunenberg Ž1994b. and Crombez Ž1996. argue that the European Parliament is barely able to affect EU-policy choices other than by the possible veto right. In contrast, Tsebelis Ž1994. and Moser Ž1997b. claim that the European Parliament has an important influence on EU-decision-making under some conditions. 17 The emerging consensus of the empirical literature is that the impact of the Parliament in EU-decisions depends on which decision rule applies, and on whether restrictions change during the decision process in such a way that the Parliament can take advantage of the changes ŽMoser, 1997b.. With respect to the decision rules, it is not surprising that the influence of the Parliament is small or absent in those policy issues that are decided by the consultation procedure. By this procedure, the Parliament is only consulted and has no further procedural rights. It can at best influence the decision by threatening delay. An important case in this respect was the decision on the first phase of Economic and Monetary Union. Since the Commission was anxious to avoid delay, it made an important concession to the Parliament Žsee Jacobs and Corbett, 1990, p. 166.. However, more influence by the Parliament can be expected on policy issues that are decided by the cooperation procedure or by the codecision procedure. Both procedures grant the Parliament a veto right—unconditional in the codecision procedure, conditional of not being overridden in the cooperation procedure—and allow the Parliament to make amendments which can only be rejected unanimously by the Council if these amendments are supported by the Commission. A major difference between these two procedures is that in the codecision procedure, a Conciliation Committee comprising members of the Council and the Parliament convenes, if not all amendments of the Parliament have been approved by the Council. If there is no agreement, the Council can make its final offer, which must be accepted by the majority in the Parliament or otherwise fails. There is some dispute whether the codecision procedure increases the influence of the Parliament compared to the cooperation procedure Žsee the discussion between Tsebelis, 1997 and Moser, 1997a.. Miller Ž1995. in his empirical assessment of the first 33 cases decided under the codecision procedure reports no case were the Parliament achieved less than under cooperation. In contrast, the example of the bill on engine power of two- or three-wheel motor vehicles indicates that the Parliament achieved more under codecision than it could have achieved under cooperation. If the cooperation or the codecision procedure applies, the Parliament can only successfully influence policy choices, other than blocking them, if it can take advantage of changes in the restriction, such as changes of the policy positions of

17

What these conditions are is disputed: see Moser Ž1996a. and Tsebelis Ž1996. with respect to the cooperation procedure.

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decisive Council members or of the Commission, a change of the reversion point, or changes in the policy dimensions. A case which illustrates the importance of what happens if no agreement is reached, is the decision on car emission standards. In this case, the Parliament succeeded in forcing the Commission and the Council to approve stricter emission standards preferred by the Parliament. Hubschmid and Moser Ž1997. point out that the decisive factor which induced the Commission to accept the amendment of the Parliament was the change in the position of the European Court of Justice, which changed the reversion policy if the Commission and the Council rejected the Parliament’s proposal. A decision on the sweeteners directive is an illustrative example of how a change in policy dimensions increases the influence of the European Parliament. Earnshaw and Judge Ž1993. report on how a substantive dispute became a procedural conflict: the issue was transformed from the degree of transparency for consumers Žand of protection for producers. to procedural rights of the Parliament. The Parliament rejected the common position in its final reading for procedural reasons. Since no unanimous vote was possible in the Council, the proposal lapsed. Finally, the study of the packaging waste directive by Golup Ž1996. confirms that the impact of the Commission and the Parliament is limited if a qualified majority in the Council objects to changing the status quo. A conclusion drawn from this research is that details in the complex decision structure are very important. This explains why policy making in the EU is often determined by procedural disputes: the various players try to make the most out of institutional reforms such as to increase or defend their influence. 3.3. Coalition goÕernments Many parliamentary systems, in which the parliament elects the executive, are characterized by coalition governments. This is often the case in those countries that use a system of proportional representation. The formation of a government after an election raises several compliance problems, very much analogous to those of individual legislators trading votes. First, the government might pursue a different policy on an issue than that promised to a coalition member in the coalition agreement. Second, some coalition members might renege by holding up legislation promised to another member. Austen-Smith and Banks Ž1990. and Laver and Shepsle Ž1990, 1996. propose that one way to mitigate these compliance problems is the ministry system. Ministries have jurisdiction over a well-defined set of policies and usually have the right to initiate legislation in their areas. An important variable in the coalition agreement is the assignment of ministers. Delegating initiation and implementing power to the ministries limits the ability of coalition members to pursue a different policy than was promised, because the relevant ministry holds the right to initiate legislation and thereby can at least block any policy change. This approach to the ministry system implies that only few policy proposals in the policy space are

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credible, namely those that are policed by an allocation of cabinet positions. The number of credible positions may be quite small if the number of policy dimensions is low, the number of parties small, and internal party discipline high. Thereby, the problem of instability is drastically reduced: an alternative coalition can only replace the incumbent government if the alternative is a credible policy and if this is preferred by a legislative majority. Furthermore, this approach allows us to explain the existence of minority as well as oversized majority governments. The policy position of a minority government may be preferred by a majority to the incumbent government and itself be invulnerable to other coalitions or minority governments. It is also possible that a party may be needed for the credibility of a proposal even if it is ‘surplus’ to the legislative majority. But the ministry system alone seems insufficient to initiate new legislation, and the assumption of policy dictatorship by ministers is too strong. However, a main feature of parliamentary systems is that a government proposal has to be approved by each party of the coalition ŽTsebelis, 1995. and that government can be forced to resign by a ‘no confidence’ vote. This possibility allows coalition partners to threaten the government if it is not fulfilling the coalition agreement Žon this, see for example Baron, 1993.. While certainly an imperfect mechanism, the fact that party leaders wish to remain in power places some limits on the degree to which they can deviate from the original exchange without consent of the coalition members. 18 Empirical research in this area is only beginning and the main focus is on verifying the assumptions. The contributions of Laver and Shepsle Ž1994. find substantial support for the central assumptions of the model. These studies also highlight the special role of the prime minister, who sets the agenda and has veto rights in all policy dimensions. Still missing are studies which address the question of the extent to which different portfolio allocations influence policy choices. 3.4. LegislatiÕe decisions in direct democracies A survey of the impact of legislative institutions on policy choices would be incomplete without considering direct-majority rule decision by voters. The formal research was initiated by Romer and Rosenthal Ž1978. and extended by Steunenberg Ž1992. who analyzed the impact of referenda and initiatives on public expenditure. Policy choice is however one-dimensional in this literature, and the agenda setter is usually a single player Žfor example, an executive or a unicameral legislature.. With the emergence of the global cycling theorem, direct democracy has been identified as a pure majority rule and therefore regarded as unable to 18 An interesting extension is to combine theories of election with theories of coalition formation Žsee Austen-Smith and Banks, 1988 and Baron, 1991, 1993.. If voters are interested in policy outcomes, they already have to take into account the subsequent coalition formation at the election stage.

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generate stable outcomes Žsee particularly the critique of populism of Riker, 1982.. However, in many countries, direct democratic decision-making combined with representative forms in fact induces policy stability. An example is Switzerland, which is the country with the most intensive use of direct democracy at the federal level. Legislative decisions require the approval of both chambers in parliament and the support of a majority of voters if 50,000 citizens ask for a referendum. Consequently, the Swiss political system consists of three veto players. This creates substantial stability Žsee Blankart, 1992; Moser, 1996b.. Therefore, the ongoing discussion in Switzerland is not about the fear of too much instability, but rather of too much stability Žsee the contributions of Borner and Rentsch, 1997.. The proposed reforms of the constitution intend to strengthen the direct influence of voters by giving them the right to propose changes in the legislative statutes, a right which was granted to the citizens only with respect to constitutional amendments. 19 In contrast to many previously discussed legislative institutions, there is considerable empirical research of the impact of direct democracy on policy choices. The classical study is by Pommerehne Ž1978. who analyzed the expenditures of the 110 largest towns in Switzerland. Classifying the towns according to their degree of direct democratic participation, Pommerehne reported first that the median voter theorem is important only in those towns with direct democratic participation and, second, that the growth of expenditures is lower in towns with direct democracy than in towns with representative forms of government. Schneider and Pommerehne Ž1983. estimated for the communities with representative democracy that their growth of expenditures between 1965 and 1975 would have been 6.8% instead of 9.6%, if they had been organized as direct democracies. Similar results are found by Matsusaka Ž1995. with respect to the American states. In those states with referenda with respect to expenditures, expenditures were US$60 lower per capita than in states with pure representative decision-making. Direct democracy also tends to reduce public debt Žsee Feld and Kirchgassner, ¨ 1999 on Swiss communities and Kiewiet and Szakaly, 1996 on American states.. The right to participate directly also seems to improve the tax morality. Pommerehne and Weck-Hannemann Ž1996. show that tax evasion is lower in those Swiss cantons in which the citizens can more directly influence the budget. Feld and Savioz Ž1997. reveal an important relation between direct democracy and economic performance in Swiss cantons, measured as gross domestic product per capita. In 1990, GDP per capita was 15% higher in those cantons with a high degree of direct democracy compared to purely representatively organized cantons. For the average of the period 1984–1990, the difference was still 5%. These results indicate that the choice between representative and direct democracy, or more precisely the degree of representation, has a substantial impact on

19

The consequences of these reforms are analyzed in Moser Ž1996c..

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policy choice. The empirical research has focused on the behavior of lower level governments in federal systems characterized by an intensive competition among jurisdictions. The open issue is, to what extent and in which direction does a higher degree of direct democracy influence decisions of large central governments?

4. Legislative institutions and bureaucratic influence A large part of policy choices are not made by legislators themselves. Rather legislators delegate authority to an agent, such as to ministers in cabinet governments, commissions, or to bureaus. Such delegation from principals to agents allows the realization of gains from specialization based on training and situation specific knowledge. A conflict of interest however arises between principals and agents whenever they have different preferences or face different constraints and the principals cannot observe the efforts of the agents directly Žsee Jensen and Meckling, 1976; Holmstrom, 1979; and the survey by Hart and Holmstrom, 1987.. This allows agents to follow their own preferences to some degree. Two sources of agency discretion can be distinguished: informational advantages and advantages resulting from the structure of the legislative process. 4.1. Information-induced discretion It is usually argued that agents possess superior information, for example, they know the costs of providing services which legislators do not know ŽNiskanan, 1971., or that they are better informed about the consequences of policy choices ŽGilligan and Krehbiel, 1987.. Agents can use this informational advantage strategically in consciously failing to pursue the policy objective that legislators would desire. The literature on bureaucratic and regulatory behavior has focused mainly on information-induced adÕantage Žsee the survey by Noll, 1989.. According to one view, bureaucracies operate with considerable independence from legislators, and the behavior depends significantly on what they maximize; the budget ŽNiskanan, 1971., the surplus ŽMigue and Belanger, 1974., a combination of both ŽFrey and Kirchgassner, 1994, pp. 182–185., or employment ŽBernholz ¨ and Breyer, 1994, Chap. 15. or their own policy agenda. On the other hand, a host of studies on US agencies argue that bureaucrat’s decisions directly reflect the wishes of their principals such that there is not much deviation. The dispute in this literature concerns whose wishes are followed, those of a representative politician ŽStigler, 1971; Peltzman, 1976., of Congressional committees ŽFiorina, 1981; Weingast, 1981, 1984; Weingast and Moran, 1983; Gilligan et al., 1989., the majority party ŽKiewiet and McCubbins, 1991., or the President ŽMoe, 1985.. According to the latter view, elected officials induce agent compliance by using such tools as decentralized information gathering, for example by particularly

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affected interest groups ŽMcCubbins and Schwarz, 1985; Banks and Weingast, 1992; Epstein and O’Halloran, 1995.. The same purpose is served by organizational structures ŽShughart et al., 1986; Macey, 1992., budgetary control ŽCarpenter, 1996., and by administrative procedures which ensure that benefits flow to the relevant legislative constituents ŽMcCubbins et al., 1987, 1989; the limits of this hypothesis are pointed out by Hill and Brazier, 1991.. 20 Furthermore, principals can use appointments in order to commit to a certain policy ŽRogoff, 1985; Calvert et al., 1989; Spulber and Besanko, 1992; Havrilesky, 1995. and can employ promotions as means to reward loyal behavior. In any case, politicians can make themselves better off by shifting some resources to monitoring bureaus that are absorbing revenues in ways that do not benefit their constituencies Žas modelled by Banks, 1989 and Bendor et al., 1985, 1987.. 4.2. Structure-induced discretion Besides the informational advantage of agencies or bureaus, agency discretion results from the structure of the legislative process. The idea is straightforward: when legislators delegate authority to an agency, they permit the agency to make the first move; that is, to establish a policy or a course of actions which will be the policy that prevails, unless preempted by legislative action. If legislative decisionmaking were completely unstructured, any policy chosen by an agency could be replaced whenever several dimensions are involved. This is a direct consequence of the global instability of pure majority rules. But since most legislatures have structures that constrain majority rule comparisons—of the types discussed in Section 3, legislative equilibria exist. Whenever legislative equilibria are created because several veto institutions exist, the agency faces multiple principals with different preferences, and can take advantage of this. This idea is illustrated with the help of Fig. 5, following McCubbins et al. Ž1989., p. 438. 21 There are two chambers ŽA and B. with equal legislative rights. For simplicity, I treat the chambers as single players with ideal points at x A and x B , respectively. Since the status quo q is off their contract line x A x B , both chambers can improve their utility by agreeing to policy y 1 which an agency is asked to implement. If the agency implements a policy off the contract line, the two chambers can reverse the agency’s policy. However, if the agency chooses another policy on the contract line, say y 2 , the legislators cannot reverse the decision because of conflicting interest: chamber B favors the policy by the 20

The courts’ interpretation of procedural rights, of course, constrains politicians in designing procedures to endure a particular policy outcome ŽMcCubbins et al., 1990.. However, legislators can also influence statutory interpretation by courts. As Rodriguez Ž1992. argued, since courts pay attention to legislative history, legislators have an incentive to shape legislative history such that it constrains judicial interpretation. 21 For a one-dimensional representation, see Ferejohn and Shipan Ž1990. and Steunenberg Ž1996..

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Fig. 5. Legislative structure and agency discretion.

agency and does not agree to reverse policy to y 1. Consequently, the agency can potentially choose any point on the contract line x A x B , with the two chambers unable or unwilling to reverse the policy. Agency discretion is even greater if there are three veto institutions, for example, an executive with legislative veto power. If the executive has preferences different from the two chambers, as drawn in Fig. 5 with x C being the executive’s ideal point, no legislative correction or punishment is possible so long as the agency stays within the triangle x A x B x C . The magnitude of agency discretion depends on legislative institutions, including decision rules and party organizations. Models in this line of research accordingly have to include a reasonable set of institutional actors Žon US legislative institutions, see Calvert et al., 1989; Ferejohn and Shipan, 1989, 1990; Eskridge and Ferejohn, 1992; Epstein and O’Halloran, 1994; Hammond and Knott, 1996; for parliamentary systems, Steunenberg, 1994a and Tsebelis, 1995.. One result merits emphasis: the introduction of a gatekeeping institution Žfor example, a committee or a cabinet. without an ex post veto power increases the set of policies from which the agency can choose. Under these rules, once the gatekeeping institution has introduced legislation, it no longer has control over the legislative decision. Therefore, a committee or a cabinet with such powers will be reluctant to open the gate in the first place, what can be exploited by the regulatory agency. I previously assumed that all three players can introduce a proposal, suggest amendments, and have veto rights. Suppose now that B in Fig. 5 is the only player who can introduce a legislative proposal, but has no veto right. B has

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to predict the legislative outcome, when deciding whether to introduce a proposal. The legislative equilibrium will be on the contract line x A x C , but which point on this line will be chosen depends on relative bargaining strength and on the precise location of the agency’s policy. The most preferred point for B on the contract line x A x C is y 3 , which corresponds to the most optimistic prediction of the legislative choice. The agency cannot only choose a policy inside the Pareto set Žtriangle x A x B x C . but also a point outside this set as long as it is inside the preferred-to set of y 3 , the area inside the indifference circle through y 3 . Then, the agency can be certain that B will not introduce a legislative proposal. Consequently, gatekeeping rights without ex post veto substantially increase agency discretion. The argument that legislative structure determines the range of agency discretion creates additional reasons for protection against agency noncompliance. Specifically, this is the case in those legislative systems that have several heterogeneous veto and gatekeeping institutions Žsee McCubbins et al., 1989, p. 439.. First, if political actors are risk averse, all prefer greater certainty in policy implementation as compared to random noncompliance. Second, they have an incentive to avoid the following negative sum game: after passing the legislation, each political actor has an incentive to spend resources in persuading the agency to move policy towards his or her most preferred policy. Structure-induced agency discretion has interesting consequences for regulatory oversight, as pointed out by McCubbins et al. Ž1989.. Since it is often impossible for legislators to correct an agency’s decisions, ex post rewards are not an effective mean for achieving compliance. Rather cumbersome decision-making processes, such as hearings that warn the principals of noncomplying decisions before they are taken, can be in the interest of political actors. The ineffectiveness of ex post sanctions provides an additional explanation why politicians have an incentive to set up decision-making environments which compel the agency to be responsive to the constituency interests that were represented in the enacting coalition. It becomes difficult for the agency to deviate from the agreed policy which is in the interest of the enacting coalition. Examples of such constraints are the allocation of the burden of proof and the granting of rights to take legal actions against agency decisions affecting particular interest groups. 4.3. Discretion of the European Commission The implementation process of common policies in the EU is an example of structure-induced discretion. The Commission is an important player in the legislative process, and is also permitted to implement common policies. Because of the qualified majority Žand sometimes even unanimity. requirement in the Council, the veto rights of the European Parliament and because of the Commission’s agenda rights, the size of the legislative SIE can be quite large, particularly if the players have heterogeneous preferences. This set of points represents the feasible Commission policies, defined as those policies which the Commission can

24

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implement without being reversed by the legislators. In addition, the implementation decisions of the Commission are made conditional on specific procedural requirements, the so-called comitology procedures Žanalyzed in detail by Steunenberg et al., 1996, 1997 and Steunenberg, 1997.. A common element in these procedures is that a committee of national governmental officials from the various member states reviews the Commission implementation proposal. While such procedures may reduce the informational advantage of the Commission, it is possible that structure-induced discretion increases. The reason is that additional gatekeeping players are created: the committee might accept or not disagree with a proposal by the Commission because otherwise the Council can choose a policy which might be worse to the decisive committee member than the Commission’s proposal. Then, the Commission can take advantage of this behavior Žsee Steunenberg, 1997.. Notice that the comitology procedure may reduce the informational source of the Commission’s discretion which the structure-induced discretion raises, leaving the net effect ambiguous. 4.4. Central bank independence It might be concluded from the previous discussion that structure-induced discretion of regulatory agencies is normatively negative. This need not be the case. First, giving policy discretion to agencies can provide them with an incentive to acquire costly information as in the case of legislative committees ŽGilligan and Krehbiel, 1987.. Second, the delegation of policy issues to an agency is rendered credible, that is, the delegation cannot be easily reversed once granted. This is of particular importance in monetary policy, to resolve the credibility problem of low inflation policy. Rogoff Ž1985. suggests as a solution the creation of an independent central bank, and the appointment of a conservative central banker. However, the benefits of central bank independence depend on the existence of some costs of withdrawing the independence. The structure of the legislative process can induce costs of withdrawing and thereby make delegation of monetary policy credible. An example is a bicameral legislature with both chambers having equal power: assuming that the central bank statute grants independence to the central bank, if one chamber wishes to modify the independence but the second chamber prefers the status quo, no change occurs. As long as there are at least two veto players with different preferences, an independent central bank has some discretion in its actions without provoking an override by the legislators. Recent empirical evidence supports this: OECD-countries with a legislative process which grants structure-induced discretion have more independent central banks than other countries. Furthermore, central bank independence in the former countries is more credible. This is indicated by the stronger negative relation between inflation and central bank independence in countries with forms of checks and balances, than in those countries without checks and balances ŽMoser, 1998..

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4.5. The behaÕior of courts The concept of structure-induced discretion is not limited to regulatory behavior but can be and has been extended to explaining the behavior of courts. 22 The logic of the argument is the same as that for a regulatory agency. A court interprets a statute or a regulatory action but its interpretation can be corrected by the legislators in case of a statutory interpretation or by the constitutional decision-makers in case of a constitutional interpretation. Since such corrections are often impossible, particularly if a change in the constitution is required, courts enjoy a large degree of discretion. In this case, appointments and promotions as well as accepted legal reasoning serve as important constraints for courts. 5. Conclusions The starting point of this essay was the economic argument that a market economy relies on a set of property rights which are stable or durable and which guarantee open markets. Collective decisions based on a simple majority rule are generally insufficient to meet these requirements. Rather, additional constraints are essential, to reduce the risk of inconsistent collective choices and to increase the durability of policy decisions. Of course, such constraints are only a necessary and not a sufficient condition for a market economy, because they can provide durability for efficient as well as for inefficient allocations of property rights. A first thesis of the literature which has been reviewed is that political institutions, or checks and balances, are not only important in improving the quality of the discussion, but also, by creating veto institutions, they make it more likely that an equilibrium of collective choices exists in multi-dimensional issues. A second result is that the design of legislative procedures, particularly the allocation of agenda rights, influences the outcome of policy choices which, once chosen, cannot be readily modified. Thereby this literature contributes to an institutionally enriched theory of public choice and provides a theoretical basis for comparative empirical research. A third point is that the existence of political institutions has implications for legislative delegation to agencies. A regulatory agency can take advantage of stability-enhancing legislative institutions and choose the most preferred policy within the set of stable outcomes. On the one hand, legislators may wish to constraint such agency discretion. On the other hand, such discretion may be to the advantage of legislators because it allows them to tie their hands. 22 For constitutional interpretations, see Marks Ž1988., Gely and Spiller Ž1990, 1992.; for statutory interpretations, Ferejohn and Weingast Ž1992., Ferejohn Ž1993.; for the choice between judicial doctrines, Spiller and Spitzer Ž1992.; for an empirical test with respect to the Supreme Court, Segal Ž1997.. A related explanation of the behavior of the European Court of Justice is provided by Garrett Ž1995..

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Future research can expand the positive analysis of political institutions in several ways. A theoretical extension of this research program would include the role of checks and balances in providing information and thereby improving the quality of policy decisions. While the informational aspects of delegation have been investigated, it would be useful to extend this literature to institutions characterized by several principals facing multi-dimensional choices. Second, this kind of analysis appears well-suited for analyses of European policy choices, because the researcher is required to carefully adapt the model to prevailing institutional forms. As the survey of the literature has indicated, applications of these theories to the complex decision rules in the EU considerably enhance our understanding of these procedures. Many interesting questions remain open for further investigation, for example, the role of the European Court of Justice, decision-making inside the Commission, and the expected behavior of the European Central Bank. References Alesina, A., Tabellini, G., 1990. A positive theory of fiscal deficits and government debt. Review of Economic Studies 57, 403–414. Alt, J.E., Lowry, R.C., 1994. Divided government, fiscal institutions, and budget deficits: evidence from the states. American Political Science Review 88, 811–828. Austen-Smith, D., Banks, J., 1988. Elections, coalitions, and legislative outcomes. American Political Science Review 82, 405–422. Austen-Smith, D., Banks, J., 1990. Stable governments and the allocation of policy portfolios. American Political Science Review 84, 891–906. Banks, J.S., 1989. Agency discretion, cost information, and auditing. American Journal of Political Science 33, 670–699. Banks, J.S., Weingast, B.R., 1992. The political control of bureaucracies under asymmetric information. American Journal of Political Science 36, 502–524. Baron, D.P., 1991. A spatial bargaining theory of government formation in parliamentary systems. American Political Science Review 85, 137–164. Baron, D.P., 1993. Government formation and endogenous parties. American Political Science Review 87, 34–47. Baron, D.P., Ferejohn, J.A., 1989a. Bargaining in politics. American Political Science Review 83, 1181–1206. Baron, D.P., Ferejohn, J.A., 1989. The power to propose. In: Ordeshook, P.C. ŽEd.., Models of Strategic Choices in Politics. University of Michigan Press, Ann Arbor. Bendor, J., Taylor, S., Gaalen, R.V., 1985. Bureaucratic expertise vs. legislative authority: a model of deception and monitoring in budgeting. American Political Science Review 79, 1041–1061. Bendor, J., Taylor, S., Gaalen, R.V., 1987. Politicians, bureaucrats, and asymmetric information. American Journal of Political Science 31, 796–828. ¨ Bernholz, P., Breyer, F., 1994. Grundlagen der Politischen Okonomie, Vol. 2, 3rd edn., J.C.B. Mohr, Tubingen. ¨ Blankart, C.B., 1992. Bewirken Referendum und Volksinitiative einen Unterschied in der Politik? Staatswissenschaften und Staatspraxis 3, 509–523. Borner, S., Rentsch, H. ŽEds.., 1997. Wieviel direkte Demokratie vertragt Chur. ¨ die Schweiz? Ruegger, ¨ Brady, D.W., Cooper, J., Hurley, P.A., 1979. The decline of party in the U.S. House of Representatives, 1887–1968. Legislative Studies Quarterly 4 Ž3., 381–407.

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