Threshold Rules for Funding Environmental Mandates: Accountability and the Unfunded Mandate Reform Act

Abstract

Unfunded mandates are orders imposed by higher level governments on lower-level governments without providing the funds necessary for implementation. We highlight the following trade-off associated with unfunded mandates: on the one hand, no funding creates a risk of over-regulation by the higher-level government (the accountability principle), but on the other, full funding creates a moral hazard problem whereby the lower-level government fails to minimize the cost of implementation. We examine threshold rules that simultaneously provide incentives for efficient decisions by both levels of government. We then apply the results to the Unfunded Mandate Reform Act.