The political economy of (De)centralization with complementary public goods

Abstract

This paper provides a political economy analysis of (de)centralization when local public goods -with spillovers e¤ects -can be substitutes or complements. Depending on the degree of complementarity between local public goods, median voters strategically delegate policy to either 'conservative' or to 'liberal' representatives under decentralized decision-making. In the …rst case, it accentuates the free-rider problem in public good provision, while it mitigates it in the second case. Under centralized decision-making, the process of strategic delegation results in either too low or too much public spending, with the outcome crucially depending on the sharing of the costs of local public spending relative to the size of the spillover e¤ects. Hence, with a common …nancing rule, centralization is welfare improving if and only if both public good externalities and the degree of complementarity between local public goods are both relatively large.

Interregional negotiations and strategic delegation under government subsidy schemes

“…Consequently, the bargaining outcome is Pareto inefficient and, in some cases, even Pareto‐inferior to the outcome without negotiations. This is known as the strategic delegation problem (e.g., Besley & Coate, 2003; Buchholz et al, 2005; Cheikbossian, 2016; Dur & Roelfsema, 2005; Loeper, 2017; Segendorff, 1998). In our situation of an asymmetric role between regions, it has been shown that without a central government subsidy policy , the project does not reach the first‐best efficient level, even through negotiation (e.g., Gradstein, 2004; Loeper, 2015; Rota‐Graziosi, 2009; Shinohara, 2018).…”