How Should Standards Be Set and Met?: On the Allocation of Regulatory Power in a Federal System

Abstract Regulation often takes the form of a standard that can be met through the implementation of any of a number of different policies. This paper examines how the authority to set the standard and the authority to choose the combination of policies to meet the standard should be allocated between a central government and local governments. In the context of the United States, for example, should standards regarding such public goods as the environment or education be set and implemented by the federal government, by individual state governments, or by both? Because decisions about setting and/or meeting the standard can be non-contractible, an incomplete contracting approach is used. A central finding is that "conjoint federalism" (the central government sets the standard while the local governments meet the standard), which is the regulatory structure often used in federations such as the United States and the European Union, can be the least efficient form, while a reverse form of delegation, in which local governments choose their own individual standards which the central government then decides how to collectively meet, can be the most efficient.