State capacity to innovate

Across the political spectrum, there is a growing recognition of the importance of state capacity: the capacity of government agencies at all levels to effectively implement policies that deliver vital public goods and services, including education, health care, public safety, and growth-oriented housing, clean energy, and transportation infrastructure. The ability of government agencies to effectively deliver these public goods and services is now widely seen as essential to a future of abundance and shared prosperity.

A particularly important kind of state capacity is the capacity to innovate: the capacity of governments to develop, test, and implement more effective ways of delivering public goods and services. Government agencies need to know how they can improve education, health, public safety, and economic outcomes by adapting to emerging evidence, new technologies, and evolving community needs. And in a world of constrained public-sector budgets, agencies need to know how to improve outcomes cost-effectively: Are there alternative ways of delivering public goods and services that will produce more value for each dollar of public investment?

In the U.S., the capacity of state and local governments to innovate is particularly critical, given that state and local agencies are largely responsible for delivering essential public goods and services like education, health care, public safety, and public infrastructure. The quality of public service delivery by state and local governments is likely to become even more important, given the strongly federalist approach of the Trump administration. With fifty states, each composed of many municipalities and counties, state and local governments are well-positioned to try different approaches to solve pressing problems. But to maximize the value of these “laboratories of democracy,” state and local governments need to learn as they go—locally and from other jurisdictions—so that they can quickly pivot as needed and scale the most successful solutions.

Developing, testing, and implementing new and better ways of delivering public goods and services requires staff with specialized skills. State and local governments lacking sufficient personnel with these skills may become over reliant on expensive (and potentially underperforming) external contractors, underuse administrative data to generate useful evidence, and miss opportunities to improve the quality of public goods and services.

University-government innovation partnerships

One potential solution to the problem of state and local governments’ under-resourced capacity to innovate may lie in innovation partnerships between research universities and government agencies. Universities are home to researchers with the skills that can help agencies to develop, evaluate, and implement more cost-effective ways of delivering public goods and services. Because of universities’ research and public service missions, these skills are available at price points substantially lower than those in the government contracting market. University-based researchers may also have more of a direct interest in state and local government efficacy, relative to external contractors, given that they directly experience and help to fund state and local government services. Finally, university-based researchers may also be more interested in helping agencies build internal capacity to innovate, e.g., through upskilling workshops, than government contractors. Tapping into university talent pools can cost-effectively provide agencies with substantially increased capacity to innovate.

Where university-government innovation partnerships have developed, they have led to valuable insights benefiting communities. For example, researchers affiliated with J-PAL collaborated with state and local governments to evaluate the efficacy of services encouraging residents of public housing to move to lower-poverty neighborhoods, leading to important insights about the potential for these services to increase economic opportunity. At the University of Chicago, the Education Lab collaborated with school districts to evaluate whether high-intensity tutoring delivered by humans plus technology could improve learning outcomes as much as high-intensity tutoring delivered only by humans, leading to valuable findings about how to improve student learning outcomes more cost-effectively. At the University of California, the California Policy Lab is working with the city of Los Angeles to evaluate a program providing housing services to those predicted to be most at risk of homelessness, with the potential to more efficiently target the city’s resources where they are needed the most. At the University of Tennessee, researchers worked with Tennessee’s Office of Evidence and Impact to evaluate a program providing coaching and advising support to nontraditional college students, revealing important insights about the program’s success.

University-government innovation partnerships can cost-effectively provide state and local governments with substantially increased capacity to innovate and implement more effective ways of delivering vital public goods and services. The societal value of this increased capacity is likely very high. Recent estimates suggest that learning about the efficacy of alternative policies has value that can exceed 40% of a jurisdiction’s total budget for those policies. University-government innovation partnerships can also provide universities with beneficial opportunities to support the production of relevant new knowledge and to contribute value to their communities. But most state and local agencies do not have robust innovation partnerships with their neighboring universities. Why not?

Market failures in innovation partnerships

The literature on innovation ecosystems suggests that many potentially productive innovation collaborations fail to materialize because the transaction costs of developing those collaborations are too high. These high startup costs represent a kind of market failure, explaining why innovation ecosystems often fail to emerge despite their societal value. Even when the potential gains are large, early-stage partnerships struggle under the weight of missing infrastructure: lack of matchmaking mechanisms that help agencies identify research partners with the necessary expertise, off-the-shelf information-sharing templates, and easy ways to seed pilot projects. But this kind of market failure can often be effectively addressed by strategic investments that reduce initial transaction costs, enabling innovation ecosystems with these features to emerge and become self-sustaining. For example, 19th-century federal investments in university-based Agricultural Experiment Stations in every state led to productive and enduring agricultural innovation ecosystems that became largely funded through state funds. Similar investments in university-government innovation partnerships could likewise reduce the transaction costs that prevent these partnerships from developing, enabling innovation partnerships to thrive and become self-sufficient.

The question is, which transaction costs are the biggest barriers to the emergence of university-government innovation partnerships, and what kinds of strategic investments might most effectively launch those partnerships on sustainable trajectories?

A state and local government innovation fund

To address this question, a cross section of state and local government practitioners, university researchers, and funders gathered in “Room 16”—a working group linked to Sustainable Development Goal 16 for peace, justice, and strong institutions—of the 2025 17 Rooms flagship. In a rapid sequence of virtual meetings, the Room considered how to best design and implement a state and local government innovation fund aimed at addressing market failures in the emergence of university-government innovation partnerships.

Room 16 participants identified several key startup and transaction costs hindering the development of university-government innovation partnerships, as well as strategic, short-term investment opportunities that could reduce transaction costs and enable these partnerships to develop and become self-sustaining.

To scale the impact of these investments, the Room proposed a state and local government innovation fund to catalyze a geographically distributed but connected policy and implementation infrastructure. The fund would aim to mobilize R&D collaborations between universities and state and local government agencies aimed at improving the delivery of vital public goods and services. The fund would be based on three core design principles:

1. Outcomes-focused: Funding would be awarded to collaborations that articulate measurable goals tied to improvements in the delivery of public goods and services.
2. Locally designed: Universities and state and local government agencies would jointly propose governance structures, staffing models, and evaluation approaches appropriate to their institutional contexts.
3. Scalable and reusable: The fund would prioritize learning that generates playbooks, tools, and data infrastructure models that could be adopted across jurisdictions.

The fund could support combinations of interventions that best address jurisdictions’ government innovation needs. For example, these could include:

• Partnership development events. University-based researchers have few opportunities to meet state and local government staff and learn about agency research priorities. In the absence of opportunities to learn about agency needs, researchers often design research projects that do not address agencies’ most pressing questions. Events enabling researchers to learn about agency research priorities can reduce the transaction costs of initiating productive university-government innovation partnerships. For example, the SSRC hosts Policy Innovation Days, enabling university research communities to learn about state and local governments’ most pressing research questions, and Pilot Pitchfest, an event enabling state and local agencies to pitch their priority research projects to potential university partners. These events have the potential to be scaled to more jurisdictions.
• University-based government innovation fellowships. Another potential opportunity to reduce the transaction costs of initiating university-government innovation partnerships lies in university-based research administration fellows to lead the work of developing these partnerships. Located in universities’ central research administration offices, government innovation fellows with both government and research experience could develop and host events like those described above, support agencies in the work of developing prioritized learning agendas, develop upskilling workshops for agency staff, organize evidence summaries on topics of interest to state and local agencies, facilitate the development of persistent institutional-level data sharing agreements, and provide project management support to ensure adherence to tight agency deadlines. In the same way that University Innovation Alliance fellows advance administrative initiatives related to undergraduate student success, the government innovation fellows would advance administrative initiatives aimed at reducing the transaction costs of university-government innovation partnerships and facilitating the development of these partnerships.
• Agency-based government innovation fellowships. University-government innovation partnerships are often undermined by the high transaction costs posed by the constraints on sharing access to restricted administrative data. Agency-based government innovation fellowships enabling faculty and students to embed in agencies for defined periods of time can substantially reduce these costs. They facilitate access to restricted agency data, allowing researchers to better understand agency processes, and incentivizing policy-relevant research collaborations aimed at developing and testing solutions to agency needs.
• Pilot funding. Agencies may want to pilot innovation collaborations before committing further resources. The absence of pilot funding can pose another transaction cost to initiating university-government innovation partnerships. Providing pilot funding for short-term projects would enable both agencies and universities to de-risk innovation partnerships and facilitate the development of more extensive collaborations.
• Shared government innovation resources. Another potential way to reduce the transaction costs of university-government innovation partnerships is to create common government innovation resources that can be shared across jurisdictions. These resources could include the evidence summaries and curricula for training workshops described above, and could also include templates for standardized data sharing agreements and libraries of research findings translated into standardized cost-effectiveness metrics. Creating these common government innovation resources centrally would reduce the transaction costs to jurisdictions of developing them on their own.
• Cross-jurisdiction collaboration. Finally, successful models can be elevated and adapted across jurisdictions, supported by common tools, templates, and shared learning infrastructure. Collaboration across jurisdictions would enable agency staff and university researchers to learn about policy-relevant research findings from other jurisdictions and even to develop coordinated cross-jurisdictional innovation collaborations. Investments in infrastructure to enable collaboration across university-government innovation partnerships would further reduce the transaction costs of learning across jurisdictions.

A strategy for building a state and local government innovation fund

The fund would first invest deeply in a small number of vertically integrated, domain-focused partnerships—such as homelessness prevention, criminal justice reform, or education—where urgency, early leadership, and existing university-government ties offer fertile ground. Partnerships would also be encouraged to establish multistakeholder governance structures that align research priorities and projects with community-identified needs, ensuring that innovation efforts are rooted in the lived experiences and priorities of the communities they serve.

By sequencing investments to first support a small number of deep, well-documented partnerships, the fund can generate proven models that are later adapted and expanded, ensuring sustainable and scalable impact. Partnerships would be evaluated not only on improvements in program outcomes, but also on their ability to enhance government agencies’ long-term capacity to use data effectively, embed evidence into decisionmaking, and streamline processes for launching research collaborations.

To catalyze these partnerships, the fund would issue an open call for proposals, inviting teams composed of universities and state or local agencies to submit partnership models aimed at improving public goods delivery through research and evaluation. Where possible, partnerships would be structured to include co-investment from universities and governments, creating shared ownership and sustainability for the work.

For relevant parties interested in advancing the proposed fund, the following next steps are top priority:

1. Convene external experts to test alignment with policy priorities in e.g., public innovation, criminal justice, education, health, clean energy, and/or digital service delivery.
2. Design a first open call: develop eligibility criteria, application guidance, evaluation rubric, and outcome targets.
3. Solicit input and feedback: create a semi-structured opportunity for partners to ask questions and refine approaches.
4. Select initial pilot awards: launch a competitive round with a small number of grants to diverse university–government pairings across geographies and policy domains.
5. Establish a learning architecture: set up a cohort structure with facilitated cross-site learning, technical assistance, and public storytelling.

Conclusion

By addressing the market failures that block the formation of university-government innovation partnerships, a state and local government innovation fund can galvanize substantial increases in government innovation capacity and improve the quality of public goods and services. We see this as an exciting way to help government agencies better serve their communities, and, ultimately, improve the lives of their residents.