Legislative Capacity and Credit Risk

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 creditworthiness. 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. Replication Materials: The data, code, and any additional materials required to replicate all analyses in this article are available on the American Journal of Political Science Dataverse within the Harvard Dataverse Network, at: https://dataverse.harvard. edu/dataset.xhtml? persistentId=doi:10.7910/DVN/WYA1S2. Legislatures vary widely in their ability to translate policy preferences into policy outcomes. Limited by informational resources, time in session, or legislators’ incentives to invest in the policymaking process, some legislatures simply do not possess the institutional capacity to effectively bring policy in line with public sentiment. In such contexts, it is difficult to alter policy in response to changing needs or preferences, and “democratic deficits” are more likely (Lax and Phillips 2012). Where legislative capacity is high, however, the translation of preferences into outcomes can be more efficient and legislatures are more likely to produce policies preferred by voters (Maestas 2000). Normatively, the increased democratic responsiveness induced through increased legislative capacity is an invaluable public good. However, the broader political economic implications of legislative capacity are, at present, not well understood. There is no shortage of research on legislative capacity (or professionalism). For example, previous studies have explored how capacity influences the composition of assemblies in terms of both partisanship and diversity (Fiorina 1994; Squire 1992), coattail effects and reelection rates (Berry, Berkman, and Schneiderman 2000; David Fortunato is Assistant Professor, Department of Political Science, Texas A&M University, 2010 Allen Building, 4348 TAMU, College Station, TX 77843-4348 (fortunato@tamu.edu). Ian R. Turner is Assistant Professor, Department of Political Science, Yale University, P.O. Box 208301, New Haven, CT 06520-8301 (ian.turner@yale.edu). The authors would like to thank Andrea Aldrich, Jim Alt, Bill Clark, David Lassen, Matthew Lebo, Nate Monroe, Jessica Trounstine and the Understanding Politics seminar at UC Merced, three anonymous reviewers, and the editor for helpful suggestions and feedback. All errors of omission or commission belong to the authors alone. Carey, Niemi, and Powell 2000), patterns of internal organization and legislative scrutiny (Carroll and Cox 2012; Martin and Vanberg 2011), and legislatures’ public approval (Kelleher and Wolak 2007). But only a very small portion of this research has examined the effects of capacity on policy outcomes. Moreover, these outcomeoriented studies have tended to focus on particular policy issues such as welfare generosity (Martin and Vanberg 2015), labor laws (Huber and Shipan 2002), or energy regulation (Ka and Teske 2002). When studies have taken a more general approach to policy, their primary concern has been the congruence of citizen preferences and legislative outcomes, and there is agreement that congruence increases with capacity (Lax and Phillips 2012; Maestas 2000). Our contribution here is a broader exploration of the political economic implications of the capacity to rapidly and comprehensively change policy that reveals a real monetary cost to democratic responsiveness. We argue that the responsiveness facilitated by a high-capacity legislature, while providing many normative benefits, is not an unfettered public good. Highcapacity legislatures are more likely to alter the political economic landscape by, for example, altering rates of American Journal of Political Science, Vol. 00, No. 00, xxxx 2018, Pp. 1–14 C ⃝2018, Midwest Political Science Association DOI: 10.1111/ajps.12368