This article extends the concept of street-level bureaucracy to address the problem of the inflexibility and rigidity of governmental rules and regulations, a problem at the heart of the standard economic argument against an active government role in the management of the economy. In so doing, it seeks to create a conceptual bridge over which a range of social science disciplines can be drawn into the debate about public sector management and thereby expand the repertoire of policy tools. The article draws primarily on research on one class of street-level bureaucratic organizations, labor inspection organizations in Latin America and southern Europe, and secondarily on a project focusing on DARPA, the research arm of the US Department of Defense. In both organizations, line officers have wide discretion in program development and management and in effect adjust to changing economic and social conditions in a way not unlike the market. These adjustments are grounded in tacit rules that evolve through discussion among the line agents coping day-to-day with novel cases. Management can influence that evolution by entering into the ongoing discussion and giving it direction. Various ways in which it might do so are examined.