Reverse Regulation? National Political Budget Cycles and the Moderating Power of Transnational Rating Agencies

25 Pages Posted: 7 Sep 2019

See all articles by Marek Hanusch

Marek Hanusch

World Bank

Paul M. Vaaler

University of Minnesota, Twin Cities - Law School and Carlson School of Management

Date Written: August 31, 2019

Abstract

Regulatory theory assumes that national governments seek to constrain undesirable firm behavior, either through direct governmental oversight, or through oversight delegated to non-governmental organizations. We reverse that assumed relationship with the first study investigating when and how certain for-profit businesses of international scope constrain undesirable national government behavior. We ground our study in transnational regime theory explaining when and how for-profit firms position themselves as private regulators, and political budget cycle theory explaining when national governments are more likely to violate regulatory policies and respond to private regulatory enforcement by these for-profit firms. We document empirical support for our framework through analyses of sovereign credit ratings published by major credit rating agencies (CRAs) and borrowing by 63 national governments holding 111 executive elections from 2001-2011. Governments borrow less excessively during election years when CRAs put them on watch for a sovereign rating downgrade, which hurts re-election prospects in the short term and raises national borrowing costs in the longer run. Our study suggests new avenues of management research investigating when other for-profit firms (e.g., insurance firms) are more likely to constrain undesirable government behavior, and new avenues of public policy research aimed at using for-profit firms to discipline developing country governments (e.g., Cape Verde) trying to maintain responsible fiscal policies as they democratize.

Keywords: Regulation, transnational regimes, political budget cycles, rating agencies, elections

JEL Classification: F23, F34, F63, F65, G15, P16

Suggested Citation

Hanusch, Marek and Vaaler, Paul M., Reverse Regulation? National Political Budget Cycles and the Moderating Power of Transnational Rating Agencies (August 31, 2019). Available at SSRN: https://ssrn.com/abstract=3446380 or http://dx.doi.org/10.2139/ssrn.3446380

Marek Hanusch (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Paul M. Vaaler

University of Minnesota, Twin Cities - Law School and Carlson School of Management ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States
612-625-4951 (Phone)
612-626-1316 (Fax)

HOME PAGE: http://carlsonschool.umn.edu/faculty/paul-vaaler

Register to save articles to
your library

Register

Paper statistics

Downloads
4
Abstract Views
89
PlumX Metrics