Budgeting for Innovation: How Funding Strategies Enable or Constrain Public Sector Experimentation

We investigate how different funding strategies influence the incentives and capacities of government organizations to undertake experiments. We focus on the effects of "earmarked" vs. "hodgepodge" funding and the implications of different approaches to designing earmarked funding (system-level vs. organization-level; top-down vs. bottom-up). We conducted 66 interviews with public officials in Estonia and Finland. We find that different funding strategies influence the scope of public sector experiments. System-level top-down earmarked funding facilitated the launch of strategic large-scale policy experiments in Finland. Reliance on hodgepodge funding of experiments in Estonia has led to predominantly small-scale experiments and increased transaction costs.