“Carve-Outs” from the Workers’ Compensation System / 467 David I. Levine Frank Neuhauser Jeffrey S. Petersen “Carve-Outs” from the Workers’ Compensation System Journal of Policy Analysis and Management, Vol. 21, No. 3, 467–483 (2002) © 2002 by the Association for Public Policy Analysis and Management Published by Wiley Periodicals, Inc. Published online in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/pam.10055 Manuscript received November 2000; revise and resubmit recommended January 2001; second revision April 2001; accepted January 2002 Abstract Decentralized regulation has become increasingly important in many areas; examples range from school vouchers to workplace safety committees to alternative dispute resolution procedures replacing courts. Consistent with this trend, in 1993 California permitted construction unions and employers to “carve out” their own workers’ com- pensation system. This study examines California’s early experience with carve-outs by analyzing two case studies, a survey of all carve-outs in existence during the study period, and preliminary data on costs and dispute frequency at one carve-out. Overall, carve-outs do not appear to harm employees, and sometimes they help. At the same time, data analysis of one carve-out showed it had no effect on costs and dispute rates. Moreover, the low involvement of union officials and the many issues that overlap other parts of workplace regulation raise concerns about decentralizing workers’ com- pensation. Lessons can be learned for other spheres of regulation. © 2002 by the Asso- ciation for Public Policy Analysis and Management. INTRODUCTION Decentralized self-regulation is replacing command-and-control regulations in many spheres of government intervention around the globe. Examples include school vouchers in many nations, food and transportation safety in the United States, equal employment opportunity regulation in the United Kingdom and United States, and pollution regulation in Indonesia. 1 Decentralization holds the promise of increasing flexibility and experimentation while lowering dispute rates and compliance costs. Decentralization also raises the risks of organizations evading their responsibility under the law (see references cited in footnote 1). This study examines one innovative form of decentralized self-regulation—workers’ compensation in the California construction industry. In California, and in 11 other states, construction unions and management can bargain to create an alternative workers’ compensation system (a “carve-out”) that replaces much of the state run system. 1 On employment see U.S. Department of Labor (1994) and Levine (1997); on food safety see Michael (1996); on equal employment opportunity see Dickens (1999); and on pollution see Pargal and Wheeler (1995).