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The decentralization tradeoff for complementary spillovers

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  • Martin Gregor

    ()

  • Lenka Stastna

    ()

Abstract

We examine a symmetric two-district setting with spillovers of local public spending where a spill-in from the foreign spending is not a substitute, but a complement to domestic spending. Specifically, we assume production of two district-specific public goods out of two complementary district-specific inputs. We compare equilibria in non-cooperative decentralization and cooperative centralization for different spillovers, complementarities and cost-division rules, and control for the effects of strategic delegation and the feasibility of voluntary contributions to the input in the foreign district. We find that centralization welfare-dominates decentralization in most institutional settings and for a wide range of parameters, yet we can also identify necessary and sufficient conditions for decentralization to welfare-dominate centralization. The setup features three novelties: In the absence of transfers, welfare in decentralization increases in spillovers, strategic delegation in decentralization improves welfare, and centralized provision may be non-monotonic in spillovers.

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Bibliographic Info

Article provided by Springer in its journal Review of Economic Design.

Volume (Year): 16 (2012)
Issue (Month): 1 (March)
Pages: 41-69

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Handle: RePEc:spr:reecde:v:16:y:2012:i:1:p:41-69

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Related research

Keywords: Spillover; Spill-in; Complementarity; Decentralization theorem; Externality; H41; H73; H77;

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References

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  1. Ben Lockwood, 2007. "Voting, Lobbying and the Decentralization Theorem," Economics Working Papers ECO2007/06, European University Institute.
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  16. Cheikbossian, Guillaume, 2008. "Rent-seeking, spillovers and the benefits of decentralization," Journal of Urban Economics, Elsevier, vol. 63(1), pages 217-228, January.
  17. Bergstrom, Theodore C & Cornes, Richard C, 1983. "Independence of Allocative Efficiency from Distribution in the Theory of Public Goods," Econometrica, Econometric Society, vol. 51(6), pages 1753-65, November.
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Cited by:
  1. Martin Gregor, 2012. "Modeling positive inter-jurisdictional public spending spillovers," Working Papers IES 2012/16, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jun 2012.

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