Regulatory constraints on public sector innovation: a new comparative approach

Innovation is essential to the continual improvement of public sector services. Research on public sector innovation is important due to the size, scope, and complexity of public sector service delivery. The underlying assumption of the public sector innovation literature is that the public sector suffers from a lack of innovation. The standard explanation tends to focus on the management and culture that is typical of public sector bodies. From that basis, scholars have sought to foster public sector innovation by proposing the adoption of practices from the more innovative private sector. The impact of regulation on public sector innovation remains unclear within the existing theoretical framework, and that relationship has not been systematically examined. The lack of attention given to legislative and regulatory structures within public sector innovation research is a significant omission because any provision of public sector services is a deliberative decision by government guided by the political process rather than the market. This thesis makes a significant contribution to the economics of public sector innovation, developing a theoretical approach based on new comparative economics and evolutionary economics to examine regulatory constraints on public sector services, furthered by insight gained from case studies and legislative analysis of government schools, independent public schools, charter schools, and voucher programs. This thesis develops two central claims. First, in any area of public sector service provision, a diversity of institutional possibilities for service delivery can be observed. This thesis draws on the new comparative economics framework (Djankov et. al 2003; Shleifer 2005) and extends its theoretical application to a public sector context. Second, each institutional possibility - embedded in its own legislative and regulatory frameworks - will have distinct constraints of the dynamism of how public sector services are first adopted, transformed, and ultimately come to an end. As this suggests, it is possible to identify mechanisms of creation and destruction by examining legislative and regulatory provisions. This approach draws on evolutionary economics and the Schumpeterian conceptualization of innovation as a dynamic process known as "creative destruction" (Schumpeter 1942) and uses this insight a conceptual lens for legislative and regulatory analysis. Public school education provides an exemplar for examining legislative and regulatory frameworks governing public sector service delivery. There is no single method of the provision of school education. Instead, as this thesis shows, there is a spectrum of institutional forms that have emerged which seek to fulfill the aims of the public provision of school education. The institutional theory of regulation, drawn from new comparative economics, posits that society faces a trade-off between the perceived costs of private disorder and the perceived costs of government dictatorship. Institutional possibilities emerge to economize these competing risks. This thesis employs the Institutional Possibilities Frontier, associated with new comparative economics, as a tool to compare and contrast four examples of institutional possibilities - government schools and Independent Public Schools in Australia, and the American school choice programs of charter schools and voucher programs. The new comparative approach to public sector innovation characterizes regulatory constraints as costs of dictatorship. In the school education service delivery context, the centralized regulation of public services - expressed in legislation and regulatory frameworks - attempts to control various perceived risks of disorder, including problems of duplication, positive externalities, information asymmetries, parental failure, and societal dysfunction. However, amongst other costs, the consequence of centralized control of service delivery is that local autonomy, professional discretion, and dynamism, in how schools are established and closed, are necessarily constrained. The new comparative approach predicts that decentralized institutional arrangements will be more favorable to innovation as compared to centralized institutional possibilities, as more dynamic and evolutionary mechanisms of creation and destruction will be embedded in the legislative and regulatory framework governing service delivery. This thesis provides empirical support for this theoretical prediction - demonstrating that there is a correlation between regulatory structures and dynamism in a public sector context and affirming the new comparative approach's explanatory power. This thesis makes four contributions. First, the new comparative approach to public sector innovation that is developed provides a novel theoretical explanation for the lack of public sector innovation framed around regulatory constraints. Second, a unique method of analyzing regulatory constraints is advanced, which contributes to the literatures of new comparative economics, evolutionary economics, and public sector innovation, in conversation with the literature of school choice and school autonomy. Third, several empirical findings are presented through case studies and legislative analysis of public school education in the government, independent public school, charter school, and voucher program institutional contexts. Fourth, a number of insights are offered towards developing evolutionary public policy and greater dynamism in public sector service provision. Together, these contributions open up new avenues for research and chart a new agenda for public sector innovation based on regulatory and comparative institutional analysis