Does Government Decentralization Increase Policy Innovation?

Abstract

The conventional wisdom is that government decentralization promotes policy innovation because it allows for several simultaneous experiments by local governments. However, there is also a learning externality because successful policy experiments provide useful information to 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 a large number of possible experimental policies. This analysis suggests that the recent U.S. welfare reform may discourage future policy innovation.

JEL Classification: D7, H7