Career Concerns and Policy Experimentation under Decentralization∗

We examine policy experimentation in an electoral environment with imperfect information. The voters face both uncertainty about the competency of policymakers as well as a lack of transparency of policymakers’ actions. The outcome of experimental policies serves as a noisy signal of politicians’ competency, and voters reelect those they believe to be competent. This creates career concerns like incentives (a la Holmstrom, 1999) for the policymakers, which induces policymakers to increase the variance of signals voters receive. Interestingly, the incentive to increase variance leads to more experimentation under decentralization than under centralization. Another result of paper is that centralization does have an advantage in terms of selecting competent policymakers. The implications of transparency of policy choice, non-career-concern payoff of politicians are also discussed. ∗We thank Daniel Diermeier, Georgy Egorov, Tim Feddersen, Nicola Persico, Bruno Strulovici and Yiqing Xing for helpful comments. †Kellogg School of Management, Northwestern University, [email protected] ‡Department of Economics, Northwestern University, [email protected]