Experimentation in Federal Systems

53 Pages Posted: 12 Feb 2015 Last revised: 17 Mar 2017

See all articles by Steven Callander

Steven Callander

Stanford Graduate School of Business

Bård Harstad

University of Oslo - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 12, 2015

Abstract

We develop a model of policy experimentation in federal systems in which heterogeneous districts choose both whether to experiment and the policies to experiment with. The prospect of informational spillovers implies that in the fi…rst best the districts converge in their policy choice. Strikingly, when authority is decentralized the equilibrium predicts the opposite. The districts use their policy choice to discourage other districts from free-riding on them, thereby inefficiently minimizing informational spillovers. To address this failure, we introduce a dynamic form of federalism in which the central government harmonizes policy choices only after the districts have experimented. This progressive concentration of power induces a policy tournament that can increase the incentive to experiment and encourage policy convergence. We compare outcomes under the different systems and derive the optimal levels of district heterogeneity.

Keywords: Experimentation, federalism, decentralization, free-riding, tournament

JEL Classification: D78, H77

Suggested Citation

Callander, Steven and Harstad, Bard, Experimentation in Federal Systems (February 12, 2015). Quarterly Journal of Economics, Vol. 130, No. 2, 2015, Stanford University Graduate School of Business Research Paper No. 15-15, Available at SSRN: https://ssrn.com/abstract=2564051 or http://dx.doi.org/10.2139/ssrn.2564051

Steven Callander

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Bard Harstad (Contact Author)

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway

HOME PAGE: http://www.sv.uio.no/econ/english/people/aca/bardh/

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