This proposal undertakes game theoretic and empirical analysis of budget rules in the legislative process. Legislatures often attempt to implement spending limitations and other rules because of tendencies toward inefficient spending. The success of these rules varies, and game theory is particularly well suited to generate predictions of the efficacy of various rules. In addition, the U.S. states provide an ideal opportunity to test the predictions generated from the models. Three questions are addressed in this project considered. First, in what ways can endogenous enforcement of budget rules be achieved? Second, which rules of an institution can be considered exogenous for the purposes of analyzing budget rules? Third, what institutional features affect the development of budget rules? Existing work by the principal investigator has examined how externally-enforced budget rules affect spending levels by using a formal theory as well as an empirical test of state-level data. This project extends the research by examining the conditions under which a legislature could enforce its own rules. This project has both a formal and an empirical component. The research includes an infinite-horizon sequential bargaining model as well as repeated games to offer predictions regarding endogenous enforcement, and these models are be tested using data from the U.S. states. This research expands the field's knowledge of both budget rules as well as the broader concept of endogenous enforcement within institutions. The results of this research will directly contribute to the fields of American politics and formal theory, and the theory and tests can also be applied cross-nationally and provide a framework for further empirical analysis. This proposal furthers the goals of the NSF's Empirical Implications of Theoretical Models (EITM) initiative and demonstrates that formal theory and empirical analysis, when combined, can strengthen theory development in political science. In addition, the practical implications of the findings will be conveyed to a larger audience, especially policy analysts whose views can shape the development of institutions. Game theory and sophisticated empirical techniques rarely inform policy debates, but this research will produce results that have a solid theoretical foundation and also can be explained to a non-technical audience. Therefore, this research will contribute to the political science and economics literature as well as provide policy-relevant results.
