Regulation in the States. By Paul Teske. Washington, DC: Brookings Institution Press, 2004. 272p. $52.95 cloth, $22.95 paper.

Government regulation of economic activity is endemic to modern society; a vast array of everyday transactions are affected—and shaped—by rules and requirements imposed by governments. The intentions behind such regulations are typically assumed to be benign. Through regulation, governments can rectify problems caused by deceit, unaccounted costs, or unchecked power that would otherwise limit the scope and the effectiveness of markets. From a fiscal perspective, regulation is a relatively low-cost form of government activity. The budgets of regulatory agencies represent small items of government expenditure, compared with the budgets of agencies engaging in service provision or income redistribution. Because government regulation of economic activity is very often taken for granted and is of low salience to citizens, it is rarely the stuff of headline news. Among scholars, regulation has also tended to receive short shrift. Yet, as an area of public policy research, the study of government regulation deserves close scrutiny. At its best, research in this area can provide insights into the intersections of markets and governments, using the tools of positive political economy to good effect.

State governments have recently adopted many policies creating competition in service provision. These policies typically are expected to reduce costs and improve quality through organizational innovation. I present an analysis of one such initiative—the creation of charter schools. Using evidence from a survey-based study comparing charter schools and traditional public schools, I explore the relationship between competition and organizational innovation. I find that competition does appear to promote innovative local practices. But the evidence also suggests that competition can limit communication within the practitioner community, which, in turn, can stifle the diffusion of innovative ideas. Thus, policy design for local innovation may be more effective when competition is augmented with state-level strategies that promote inter-organizational cooperation and learning.

John F. Witte has been prominent in the academic discourse surrounding market-like reforms of public education. In the two-volume Choice and Control in American Education (1990), Witte and his coeditor, William S. Clune, assembled an impressive collection of analytical essays and literature reviews that highlighted relevant theoretical concerns and showcased the insights from practice available at the time. In September 1990, Witte was appointed the state's evaluator of the pioneering Milwaukee, Wisconsin, voucher program.

While the possible decline in the level of social capital in the United States has received considerable attention by scholars such as Putnam and Fukuyama, less attention has been paid to the local activities of citizens that help define a nation's stock of social capital. Scholars have paid even less attention to how institutional arrangements affect levels of social capital. We argue that giving parents greater choice over the public schools their children attend creates incentives for parents as “citizen/consumers” to engage in activities that build social capital. Our empirical analysis employs a quasi-experimental approach comparing parental behavior in two pairs of demographically similar school districts that vary on the degree of parental choice over the schools their children attend. Our data show that, controlling for many other factors, parents who choose when given the opportunity are higher on all the indicators of social capital analyzed. Fukuyama has argued that it is easier for governments to decrease social capital than to increase it. We argue, however, that the design of government institutions can create incentives for individuals to engage in activities that increase social capital.

In their 1993 article in this Review, Paul Teske, Mark Schneider, Michael Mintrom, and Samuel Best sought to establish the microfoundations for a model of a competitive market for public services between local governments in polycentric regions. An important part of their model focused on subgroups of informed citizens, especially recent movers. Theoretical analysis was supplemented by an empirical study of the factors shaping accuracy of Long Island homeowners' information about relative expenditures and tax rates of their school districts. David Lowery, W. E. Lyons and Ruth Hoogland DeHoog criticize the relevance of this empirical evidence, suggesting the atypical nature of education as a service (especially in this site) and challenging the sufficiency of the demonstrated levels of information for generating a competitive market. Teske and his colleagues reply by pointing out the general importance of education throughout American local policymaking and by defending the relevance of their measures and conclusions for their market model.

The Tiebout model of competition in the local market for public goods is an important and controversial theory. The current debate revolves around the apparent disparity between macro empirical studies that show greater efficiency in the supply of public goods in polycentric regions compared to consolidated ones and micro evidence of widespread citizen-consumer ignorance, which has been used to argue that individual actions cannot plausibly lead to efficiency-enhancing competition between local governments. We argue that competitive markets can be driven by a subset of informed consumers who shop around between alternate suppliers and produce pressure for competitive outcomes from which all consumers benefit. Using data from a survey of over five hundred households, we analyze the role of these marginal citizen-consumers and incorporate the costs of information gathering and the strategic interests of local governments into the competitive market model.