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Policy Innovation in Local Jurisdictions: Testing the Neighborhood Influence Against the Free-Riding Hypothesis

  • Johannes Rincke

    (Zentrum für Europäische Wirtschaftsforschung)

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    Before making di±cult decisions, individuals tend to collect information on decision makers in reference groups. With respect to policy innovations in a decentralized public sector, this may give rise to positive neighborhood influence on adoption decisions. On the other hand, due to learning externalities, an incentive exists to free-ride on policy experiments of others. In this paper, U.S. data on school district policies are used to show that with respect to policy experiments, decision makers indeed are heavily affected by decision makers in reference groups. The results suggest that if a given district's neighbors' expected benefits from adopting a new policy increase, this substantially increases the original district's probability of adoption. The paper thus rejects the free-riding hypothesis and supports the view that in federal systems the discusion of policy innovations is stimulated by horizontal interactions between jurisdictions.

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    File URL: http://econwpa.repec.org/eps/pe/papers/0511/0511017.pdf
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    Paper provided by EconWPA in its series Public Economics with number 0511017.

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    Length: 23 pages
    Date of creation: 23 Nov 2005
    Date of revision:
    Handle: RePEc:wpa:wuwppe:0511017
    Note: Type of Document - pdf; pages: 23. ZEW Discussion Paper No. 05-08
    Contact details of provider: Web page: http://econwpa.repec.org

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    1. Besley, Timothy & Case, Anne, 1995. "Incumbent Behavior: Vote-Seeking, Tax-Setting, and Yardstick Competition," American Economic Review, American Economic Association, vol. 85(1), pages 25-45, March.
    2. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August.
    3. Hautsch, Nikolaus & Klotz, Stefan, 2003. "Estimating the neighborhood influence on decision makers: theory and an application on the analysis of innovation decisions," Journal of Economic Behavior & Organization, Elsevier, vol. 52(1), pages 97-113, September.
    4. Hirshleifer, David & Teoh, Siew Hong, 2001. "Herd Behavior and Cascading in Capital Markets: A Review and Synthesis," MPRA Paper 5186, University Library of Munich, Germany.
    5. Brock, William A & Durlauf, Steven N, 2001. "Discrete Choice with Social Interactions," Review of Economic Studies, Wiley Blackwell, vol. 68(2), pages 235-60, April.
    6. Scharfstein, David. & Stein, Jeremy C., 1988. "Herd behavior and investment," Working papers WP 2062-88., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    7. repec:att:wimass:9127 is not listed on IDEAS
    8. Manski, Charles F, 1993. "Identification of Endogenous Social Effects: The Reflection Problem," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 531-42, July.
    9. Case, Anne, 1992. "Neighborhood influence and technological change," Regional Science and Urban Economics, Elsevier, vol. 22(3), pages 491-508, September.
    10. Krasker, William S. & Kuh, Edwin & Welsch, Roy E., 1983. "Estimation for dirty data and flawed models," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 1, chapter 11, pages 651-698 Elsevier.
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