No abstract

The central and local governments' incentives to invest in public infrastructure and compete for subsidies are determined by the trade-off between political benefits and economic costs, the latter depending on the extent of decentralization of fiscal authority. However, there has been a lack of attention to the role of labor mobility across jurisdictions, known to be particularly important when governments (center and local) cannot impose strict control on interregional migration. To analyze how the local governments determine their investment strategies to maximize the sum of welfare in the region in response to the possible policy regimes: fiscal centralization, complete decentralization and partial decentralization, I endogenize the relationship between the production labor inputs and public infrastructure provided by the central and local governments. I show that a simple model with labor mobility across regions suggests that complete fiscal decentralization and partial fiscal decentralization are not necessarily the best in terms of economic efficiency in the sense at least one local government or both local governments invest more in public infrastructure than under complete fiscal centralization. This implies that the central government is still needed to get involved in the entire process of decision making in public infrastructure provision.