Policy Experimentation and Intergovernmental Grants in a Federal System

Policymaking is a challenging production activity. A public sector organization that is often invoked to aid with this challenging activity is fiscal federalism, for a federation can act as a laboratory for policy experimentation. Yet there is no approach linking laboratory federalism to intergovernmental grants. This lacuna is puzzling, for grants are fundamental policy tools for federations. We develop an approach that fills this lacuna by interpreting grants as fiscal institutions for policy innovation: policy experimentation is encouraged or discouraged depending on the degree of grant conditionality, and a simple heuristic expresses mistake-ridden learning from experimentation.