Laboratories of Democracy? Policy Innovation in Decentralized Governments

Innovations in government produce positive externalities for other jurisdictions. Theory therefore predicts that local government will tend to produce a lower than optimal amount of innovation, as officials will prefer to free-ride on innovation by others. As Susan Rose-Ackerman observed in 1980, these two predictions, if true, tend to undermine arguments by proponents of federated government that decentralization will lead to many competing quot;laboratories of democracy.quot; In this paper, which is aimed primarily at legal academics, we review and critically assess nearly three decades of responses to Rose-Ackerman's arguments, none of which have been discussed in depth in the legal literature. In addition we sketch and evaluate, without rigorously modeling, other possible grounds for believing that local officials may have incentives to innovate in the face of the temptation of free-riding. We also analyze the policy implications that follow from our conclusion that there are no demonstrably overwhelming replies to Rose-Ackerman's skepticism. For instance, we suggest that one conclusion may be that certain regulatory regimes, such as aspects of corporate governance regulation, might best be centered at the national level, where collective action problems affecting public officials are lessened. However, we also caution that this result would depend on the likely effectiveness of industry itself propagating quot;goodquot; regulation, or the effectiveness of contracting regulatory functions out to intermediaries, such as private consulting firms or non-profit organizations, who might use property rights to more fully capture the gains of policy innovation