A Strategic Theory of Policy Diffusion via Intergovernmental Competition

Scholars have hypothesized that policy choices by national, state, and local governments often have implications for "location choices" made by residents (e.g., tax policies affect where firms set up business, welfare benefits influence where the poor live, government restaurant smoking restrictions influence where people eat). We develop a spatially explicit strategic theory of policy diffusion driven by intergovernmental competition over residents' location choices. The theory assumes that governments' decisions constitute a strategic game in which governments are influenced by their neighbors. We suggest a variety of policy contexts in which the theory is applicable. For one such context the adoption of lotteries by American states we use the theory to generate several hypotheses and then test them using event history analysis. The results provide substantial support for the theory and indicate that states compete for lottery business in a much more sophisticated fashion than has been previously recognized.