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Public Finance Review
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Cognition, Incentives, and Public Governance

Laboratory Federalism from the Organizational Viewpoint

Giampaolo Garzarelli

Università degli Studi di Roma, "La Sapienza," Rome, Italy

The second-generation theory (SGT) of fiscal federalism, which draws upon contemporary economic and industrial organization theory, hitherto focuses only on the negative benefits of public decentralization: the potentially superior ability to align perverse incentives vis-à-vis the centralized governance alternative. The SGT neglects the positive benefits of decentralization (mistake-ridden learning, flexibility, and option discovery), although the limitations of organization theory do not justify such neglect. By likening intergovernmental grants to incomplete contracts, this work shows that the SGT can include the laboratory nature of decentralization.

Key Words: experimentation • incomplete contracts • intergovernmental grants • learning • second-generation theory of fiscal federalism

Public Finance Review, Vol. 34, No. 3, 235-257 (2006)
DOI: 10.1177/1091142105285593
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