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Experimentation in Federal Systems

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  • Steven Callande
  • Bård Harstad

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 first 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. JEL Codes: D78, H77.

Suggested Citation

  • Steven Callande & Bård Harstad, 2015. "Experimentation in Federal Systems," The Quarterly Journal of Economics, Oxford University Press, vol. 130(2), pages 951-1002.
  • Handle: RePEc:oup:qjecon:v:130:y:2015:i:2:p:951-1002
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    File URL: http://hdl.handle.net/10.1093/qje/qjv008
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    References listed on IDEAS

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    1. Persson, Torsten & Tabellini, Guido, 1999. "Political economics and macroeconomic policy," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 22, pages 1397-1482 Elsevier.
    2. Besley, Timothy & Coate, Stephen, 2003. "Centralized versus decentralized provision of local public goods: a political economy approach," Journal of Public Economics, Elsevier, vol. 87(12), pages 2611-2637, December.
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    4. Persson, Torsten & Tabellini, Guido, 2002. "Political economics and public finance," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 24, pages 1549-1659 Elsevier.
    5. Jacques Cremer & Thomas R. Palfrey, 2000. "Federal Mandates by Popular Demand," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 905-927, October.
    6. Godfrey Keller & Sven Rady & Martin Cripps, 2005. "Strategic Experimentation with Exponential Bandits," Econometrica, Econometric Society, vol. 73(1), pages 39-68, January.
    7. Bård Harstad, 2007. "Harmonization and Side Payments in Political Cooperation," American Economic Review, American Economic Association, vol. 97(3), pages 871-889, June.
    8. Kollman, Ken & Miller, John H & Page, Scott E, 2000. "Decentralization and the Search for Policy Solutions," Journal of Law, Economics, and Organization, Oxford University Press, vol. 16(1), pages 102-128, April.
    9. Strumpf, Koleman S, 2002. " Does Government Decentralization Increase Policy Innovation?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 4(2), pages 207-241.
    10. Persson, Torsten & Tabellini, Guido, 1996. "Federal Fiscal Constitutions: Risk Sharing and Moral Hazard," Econometrica, Econometric Society, vol. 64(3), pages 623-646, May.
    11. Wallace E. Oates, 1999. "An Essay on Fiscal Federalism," Journal of Economic Literature, American Economic Association, vol. 37(3), pages 1120-1149, September.
    12. Koleman S. Strumpf & Felix Oberholzer-Gee, 2002. "Endogenous Policy Decentralization: Testing the Central Tenet of Economic Federalism," Journal of Political Economy, University of Chicago Press, vol. 110(1), pages 1-36, February.
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    Citations

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    Cited by:

    1. T. Renee Bowen & George Georgiadis & Nicolas S. Lambert, 2016. "Collective Choice in Dynamic Public Good Provision," NBER Working Papers 22772, National Bureau of Economic Research, Inc.
    2. Nicolas Lambert & George Georgiadis & Renee Bowen, 2016. "Collective Choice in Dynamic Public Good Provision: Real versus Formal Authority," 2016 Meeting Papers 197, Society for Economic Dynamics.
    3. Carsten Hefeker & Michael Neugart, 2017. "Non-cooperative and Cooperative Policy Reforms under Uncertainty and Spillovers," MAGKS Papers on Economics 201707, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    4. repec:eee:jcecon:v:46:y:2018:i:1:p:94-102 is not listed on IDEAS
    5. repec:eee:pubeco:v:158:y:2018:i:c:p:103-112 is not listed on IDEAS
    6. Alonso, Ricardo & Câmara, Odilon, 2016. "Political disagreement and information in elections," Games and Economic Behavior, Elsevier, vol. 100(C), pages 390-412.
    7. Millimet, Daniel L., 2013. "Environmental Federalism: A Survey of the Empirical Literature," IZA Discussion Papers 7831, Institute for the Study of Labor (IZA).
    8. Bernecker, Andreas & Boyer, Pierre C. & Gathmann, Christina, 2015. "Trial and Error? Reelection Concerns and Policy Experimentation during the U.S. Welfare Reform," IZA Discussion Papers 9113, Institute for the Study of Labor (IZA).
    9. Andreas Bernecker & Pierre C. Boyer & Christina Gathmann, 2018. "The Role of Electoral Incentives for Policy Innovation: Evidence from the U.S. Welfare Reform," CESifo Working Paper Series 6964, CESifo Group Munich.
    10. repec:eee:jcecon:v:45:y:2017:i:4:p:685-711 is not listed on IDEAS
    11. Cuicui Chen & Richard J. Zeckhauser, 2016. "Collective Action in an Asymmetric World," NBER Working Papers 22240, National Bureau of Economic Research, Inc.
    12. repec:eee:deveco:v:131:y:2018:i:c:p:79-95 is not listed on IDEAS
    13. Johannes Becker & Ronald B. Davies, 2015. "Learning to Tax ?- Interjurisdictional Tax Competition under Incomplete Information," Working Papers 201519, School of Economics, University College Dublin.
    14. Tim Willems, 2013. "Political Accountability and Policy Experimentation: Why to Elect Left-Handed Politicians?," Economics Series Working Papers 647, University of Oxford, Department of Economics.

    More about this item

    JEL classification:

    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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