Bureaucratic Discretion and the Regulatory Burden: Business Environments under Alternative Regulatory Regimes

While theoretical arguments distinguish regulatory policies from the institutional mechanisms of their implementation, empirical accounts often conflate the official regulatory policies of the government with the unofficial regulatory burden emanating from corruption and red tape. Building on the literature that emphasizes a separate and non-trivial effect of regulatory enforcement, this article identifies bureaucratic discretion as an important institutional factor that conditions the effects of regulatory policy on the business environment. An analysis of cross-sectional data covering 119 economies demonstrates that, under high levels of bureaucratic discretion, state regulatory involvement has no effect on the business environment. Low levels of bureaucratic discretion, however, accentuate the link between light regulatory burden and a business-friendly economic environment.