Does Government Decentralization Increase Policy Innovation?

The conventional wisdom is that government decentralization promotes policy innovation because it allows for several simultaneous experiments by local governments. However, this ignores a learning externality: successful policy experiments provide useful information for all governments. Local governments will ignore this externality, but a central government should take it into account. This paper uses a social learning model to compare policy innovation under centralization and decentralization. Centralization leads to more policy innovation if the local governments are relatively homogeneous or large in number. However, decentralization may induce more policy innovation if there are multiple experimental policies available. JEL classi cation: D7, H7 Key word: federalism I wish to thank participants at the 1997 Wallis Institute of Political Economy conference (University of Rochester), the 1997 Public Choice Society meetings and the UNC-Duke theory seminar for their comments. Financial support from the Latan e Fund for Interdisciplinary Research in the Behavioral Sciences is greatly appreciated. Gardner Hall, CB# 3305, Chapel Hill NC 27599-3305. email: [email protected]. Tel: (919) 966-4485. Fax: (919) 966-4986. It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country. Justice Louis D. Brandeis, New State Ice Co. v. Liebmann, 1932.