A Strategic Theory of Policy Diffusion via Interstate Competition

Scholars have hypothesized that policy choices by state and local governments in a federal system 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 interstate competition over residents ’ location choices. The theory assumes that states ’ decisions constitute a strategic game in which states 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 strong support for the theory, and indicate that states compete for lottery business in a much more sophisticated fashion than has been previously recognized. The policy discretion available to states in the American federal system creates an opportunity for states to learn from one another by observing the consequences of a policy in another state before adopting the policy themselves. At the same time, policies adopted by on