Allowing for Early and Pilot Implementations or Banning Them Outright?—Informal Economy,State Capacity and Local Innovation
We study the impact of the central-local relationship on local innovation,focusing on the embedded adverse selection and moral hazard.Local governments have private information regarding both types and actions.The central government can terminate an informal economy as well as punish exploiting actions ex-post;reflecting,respectively,the power of local decision-making and the strength of state ca-pacity.We emphasize the interplay between these two policies:when the state has weak capacity,it can only choose between two extremes-either letting it go or banning all informal economies altogether,while when the state has strong capacity,it can allow for early and pilot implementations,promoting innovation and prevent exploitation at the same time.Therefore,lenient local decision-making environments require strong state capacity as support.
local innovationinformal economycentral-local relationship
NETL
NSTL
万方数据
