Since 1932, when Justice Louis Brandeis remarked that in a federal system states can serve as “laboratories” of democracy, political decentralization has been thought to stimulate policy experimentation. We reexamine the political economy behind this belief, using a simple model of voting in centralized and decentralized democracies. We find the electoral logic suggests the opposite conclusion: centralization usually leads to “too much” policy experimentation, compared to the social optimum, while decentralization leads to “too little”. Three effects of centralization—an “informational externality”, a “risk-seeking” effect, and a “riskconserving” effect—account for the different outcomes.
By Hongbin Cai & Daniel Treisman. Here’s the whole thing (pdf). This is probably more right than wrong, but you gotta wonder: what’s “the social optimum”?