Legal Commentary

In our last exchange, Verity asked if I can really be serious about national regulation of corporations.  (Note: Verity is, as best I can tell, a real person and not a Socratic personification.)  That's a complicated debate, so I don't think we'll wrap it up in a blog post.  But the key terms of the conflict usually turn on whether competition between states would be a race to the top, bottom, or someplace in between.  For the race to the top account to be persuasive, we need a story in which states have reasons to be innovative, to put into place new ideas that will increase national welfare.   Most people think that's an easy step: everyone knows that the states are "laboratories of democracy."

Turns out, it's a lot more complicated, and in lots of cases, it may be that we shouldn't expect states to be innovative at all.  That's the takeaway from the paper I mentioned a few posts ago, "Laboratories of Democracy? Policy Innovation in Decentralized Governments."   The basic insight is Susan Rose-Ackerman's, all the way back in 1980: states have no property rights in innovative law, so why wouldn't they simply free ride on one another's efforts, rather than trying out risky new policies?  Well, there are three good rejoinders.  Our contribution in the paper is to work through all the nuance of each rejoinder.  Take the journey, after the jump.

So, there are three main ways we might imagine state officials might have incentives to overcome the free-rider problem.  The first is if policy in one place actually isn't that useful elsewhere, or information about other policies is hard to get, so that there isn't much opportunity to free ride.  We plumb the social science literature on those; obviously, it varies from policy to policy, with a key being what kind of information about a policy is the piece that has value, and who, if anyone, has incentives to share or hide that information.  A second is whether there are advantages to being a first-mover, even if others will free ride.  Again, of course, there is variation; the costs to others of copying is the driving factor.

I want to highlight the third point, because one of its most persuasive proponents is our own Rick Hills.  Rick points out that officials might want to innovate in order to win a reputation for innovation, regardless of whether others can then copy their policies.  But this mechanism depends very heavily on well-informed voters.  What if it is easy to *pretend* to have been innovative, without taking the risks of innovation?  Copy someone else's program, call it something catchy like "No Child Left Behind," and voila! you're an innovator, too.  So why take the risk in the first place?  Another problem we encounter when voters lack information is that innovating should, in that scenario, be a signal of low ability.  Ordinarily, only candidates with poor chances of winning should take risks.  So, by taking a risk, a candidate may be signalling that she has private information that her chances of winning will be low -- that is, she knows she's a bad candidate.

There's lots of other complications here -- for instance, political parties may want their candidates to avoid risk, since they will bear the reputational costs of failure. 

On the whole, we say, much of corporate law looks like the kind of policy where copying is easy, and so innovation looks likely to be low. 

Disagree? Read it and find your nit to pick.