Explaining Sustainability Innovation in City Governments: Innovation Mechanisms and Discretion Types in Multi-Level Governance

• Date: 01 July 2022
• Author: Kaifeng Yang,Jiasheng Zhang,Hui Li
• Published date: 01 July 2022
• DOI: 10.1177/02750740221090913
• Subject Matter: Articles

Explaining Sustainability Innovation in

City Governments: Innovation

Mechanisms and Discretion Types

in Multi-Level Governance

Jiasheng Zhang

1

, Hui Li

2

and Kaifeng Yang

3

Abstract

While existing studies have examined the separate effects of local governments’internal conditions and external environment

on local innovation, few have paid attention to their interactive effects. This study examines whether state-level rules regard-

ing local discretion moderate the effects of city governments’slack resources and learning, using local sustainability innovation

as an example. We distinguish two types of discretion (f‌iscal and statutory) granted by state governments. Applying a differ-

ence-in-differences (DDD) approach with a longitudinal dataset of 238 U.S. cities, we f‌ind that f‌iscal discretion strengthens the

positive effect of f‌iscal slack while statutory discretion enhances the positive effect of learning. The f‌indings uncover the com-

plex interactions between multilevel institutional arrangements and local innovation mechanisms.

Keywords

discretion, innovation, sustainability, multi-level governance

Introduction

Sustainability emphasizes the balance between human needs

and ecological well-being and consists of three pillars—envi-

ronmental, economic, and social. Sustainability innovation is

often def‌ined as any sustainability policy or program that is

new to the government adopting it (Krause, 2011).

According to the United Nations General Assembly’s sus-

tainable development goals (SDGs), cities should be inclu-

sive, safe, resilient, and sustainable. Local governments are

uniquely positioned in this process (Armstrong &

Kamieniecki, 2019). Through designing, adopting, and

implementing various innovative sustainability programs

and services (Krause, 2011), they have played an increas-

ingly salient role in this area (Yi et al., 2017a).

Nevertheless, not all city governments take such innovative

actions (Svara, 2011); among those that do, many are doing

it in a piecemeal, ad hoc manner (Saha & Paterson, 2008).

What can explain the variations of sustainability innovation

among city governments?

Studies have examined the impact of political and civic

participation (Portney & Berry, 2010), resources (Lubell

et al., 2009), residents’education level (O’Connell &

McCoach, 2008), government structure (Feiock et al.,

2008), capacity building (Wang et al., 2012a), and urban gov-

ernance regimes (Gibbs & Jonas, 2000; O’Connell, 2009) on

local governments’sustainability policy adoption. An emerg-

ing line of inquiry approaches this issue in its multi-level

governance context, highlighting how urban sustainability

is constructed and contested by multiple tiers of government

and spheres of governance (Betsill & Bulkeley, 2006;

Bulkeley & Betsill, 2005; Feiock et al., 2017). These

studies have examined the effects of state mandates (Tang

et al., 2010), intergovernmental grants (Lim & Bowen,

2018; Tang & Hill, 2018), and interlocal collaboration

(Deslatte & Feiock, 2019; Hawkins et al., 2018; Yi et al.,

2017a). For example, Homsy and Warner (2015) show that

a conducive policy and political atmosphere from the state

government encourages local sustainability innovation.

Discretion, the institutional space that higher-level institu-

tions give to lower-level institutions, is one of the most

important aspects of the multi-level governance arrange-

ments (Bulkeley & Betsill, 2005; Hooghe & Marks, 2001)

and has received tremendous attention in the public adminis-

tration literature (Holzer & Yang, 2005; Meier & Bohte,

2001).

1

Local government discretion has not always been

def‌ined carefully or consistently. Many studies use Dillon’s

1

City University of Hong Kong, Hong Kong, Hong Kong

2

The University of Hong Kong, Hong Kong, Hong Kong SAR

3

Renmin University of China, Beijing, China

Corresponding Author:

Kaifeng Yang, School of Public Administration and Policy, Renmin University

of China, 202 Qiushi Building, 100872 Beijing, China.

Email: rucyang2013@outlook.com

Article

American Review of Public Administration

2022, Vol. 52(5) 366–381

© The Author(s) 2022

Article reuse guidelines:

sagepub.com/journals-permissions

DOI: 10.1177/02750740221090913

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Rule or home rule as a proxy (Krane et al., 2001; Weeks &

Hardy, 1984).

2

Zimmerman (1995) differentiates four types

of local discretion: (1) structural—changing organizational

structures, (2) functional—adding, eliminating, or altering

functions, (3) personnel—making personnel decisions, and

(4) f‌iscal—levying and raising taxes. Krane et al. (2001)

propose four discretion categories, including legal, structural,

functional, and f‌iscal. While these conceptualizations provide

valuable insights, the measurements are subjective—based

on perceptions of state off‌icials and experts on state–local

relations, and the data are not updated.

Building on the literature, we focus on f‌iscal discretion

and statutory discretion. Fiscal discretion is the assignment

of revenue and expenditure responsibilities from a higher-

level government to lower-level governments (Oyun,

2017). It captures the amount of power local governments

have in collecting and expending f‌inancial resources. It is

similar to Zimmerman (1995)’s and Krane et al.

(2001)’sf‌iscal discretion and corresponds to the concept of

f‌iscal decentralization. Statutory discretion means the extent

to which legislatures give f‌lexibilities to local governments

regarding their decision-making power (e.g., not limiting

their policy choices) or administrative processes. It is deter-

mined or at least strongly inf‌luenced by specif‌ic enabling stat-

utes (Epstein & O’Halloran, 1999). Statutory discretion

corresponds to administrative decentralization, which con-

cerns the level of power subnational governments have in

turning policy decisions into allocative (and distributive) out-

comes through regulatory actions (Pollitt, 2007).

Scholars have had sustained interests in the relationship

between discretion and innovation. New Public

Management scholars advocate we should “let public manag-

ers manage”and give them enough autonomy to develop new

ways of processing and handling their business (Wynen et al.,

2014). Verhoest et al. (2007) argue that enlarging managerial

autonomy can increase public organization innovation. van

Thiel and van der Wal (2010) f‌ind that agencies with more

managerial autonomy exhibit more innovations. In local gov-

ernment literature, since Brandeis (1932), it has long posited

that local governments serve as “laboratories of democracy”

with each one independently pursuing different experiments.

Empirically, scholars have shown that decentralization

induces more policy innovations if multiple experimental poli-

cies are available (Strumpf, 2002). In the sustainability f‌ield par-

ticularly, Youm and Feiock (2019) f‌ind that while municipal

autonomy negatively affects interlocal collaboration on

climate change protection, local governments’f‌iscal constraints

from the state are not a signif‌icant predictor. These studies have

found inconsistent results regarding the direct effects of discre-

tion. We submit that various types of discretion may interact

with other variables differently to inf‌luence innovation.

In this study, we examined how discretion moderates the

effects of two most important local innovation mechanisms—

slack resources (Berry & Berry, 1990; Geiger & Cashen, 2002;

Walker, 1969) and learning (Gray, 1973; Rashman et al., 2009;

Walker, 2014). Applying a difference-in-difference-in-difference

(DDD) approach with a longitudinal dataset of 238 U.S. cities,

we examine how the treatment effects of granting two types of

local discretion are contingent on a city’sf‌iscal slack and learning

behavior.

Framework and Hypotheses

Integrating the local innovation literature and the discretion

literature, we adopt an interactionist view of local govern-

ment innovation, considering it an outcome from continuous

and multifaceted interactions between a jurisdiction’s inter-

nal characteristics and the institutional space where it is situ-

ated. We posit local decision-makers are rational strategists

acting within a rule-structured situation. They make decisions

based on their beliefs about the opportunities and constraints

in fulf‌illing their missions and satisfying their constituents

(Bryson, 2003; Ostrom, 2005; Vinzant & Vinzant, 1996).

Local Innovation Factors: Slack Resources

and Learning

Slack res ources. Organizational slack appears in different

kinds of resources, such as f‌inancial, material, or human

resources, and the slack in f‌inancial resources has received

extensive scholarly attention (Meyer & Leitner, 2018).

While existing studies have highlighted the importance of

slack resources on organizational innovation, the empirical

f‌indings are equivocal (Geiger & Cashen, 2002; Herold

et al., 2006). Some studies show slack resources provide

extra capacity to support organizations to innovate or a

buffer to bear the potential costs stemming from innovation

(Berry & Berry, 1990; Damanpour, 1987, 1991; Fernandez

& Wise, 2010). However, others f‌ind resources shortage

encourages organizations to focus more on marketization

and organizational innovation (Nohria & Gulati, 1996;

Walker, 2008). The discrepancy suggests the effect of slack

resources may depend on policy areas and external inf‌luences

(Fan et al., 2020).

Sustainability policy actions often require local govern-

ments to change their infrastructure from traditional energy

operating systems to new ones (e.g., retrof‌itting existing

buildings, using energy-eff‌icient devices or renewable

energy) or modify internal procedures to go green (e.g., pro-

curing green products/programs, developing inventories of

greenhouse gas emission). Such transformation entails costs

(Brown et al., 2009; Kwon et al., 2014). For instance, the

Renewable Portfolio Standards (RPS) mandates the use of

technologies that will be more expensive (Rabe, 2008).

Local decision-makers must consider whether they have suf-

f‌icient f‌inancial resources to support these policy actions and

whether the constituents will be patient enough to wait for

long-term benef‌its (Wang et al., 2012a). When a local gov-

ernment has more slack resources, local leaders perceive a

Zhang et al. 367