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Central Governance or Subsidiarity: A Property-Rights Approach to Federalism

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  • Christoph Lülfesmann

Abstract

The paper reconsiders the theory of fiscal federalism in a framework inspired by property-rights theory. We set up a two-period model where on a first stage a region in a federation can expend value-enhancing investments into a public project. The project can be implemented on a second stage, and causes spilovers on other regions. Under centralized as well as decentralized governance, negotiations on the federal level facilitate the realization of the efficient policy. Still, non-contractibility of investments causes the overall outcomes to differ across regimes. If the region with access to the public project bears the entire implementation costs of its policies, underinvestment prevails and subsidiarity (centralized governance) is superior when spillovers are weak (strong). Conversely, if linear cost-sharing arrangements are feasible, decentralized authority often leads to a socially optimal outcome while centralized authority (with majority or unanimity rule) does not.

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Bibliographic Info

Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse5_2001.

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Length: 25
Date of creation: Oct 2000
Date of revision:
Handle: RePEc:bon:bonedp:bgse5_2001

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de/index.php?id=494

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Keywords: Federalism; Property Rithts; Grants;

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References

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  1. Klaus M. Schmidt, 1995. "Incomplete Contracts and Privatization," Discussion Paper Serie A 480, University of Bonn, Germany.
  2. Aghion, Philippe & Tirole, Jean, 1997. "Formal and Real Authority in Organizations," Journal of Political Economy, University of Chicago Press, vol. 105(1), pages 1-29, February.
  3. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December.
  4. Klibanoff, Peter & Morduch, Jonathan, 1995. "Decentralization, Externalities, and Efficiency," Review of Economic Studies, Wiley Blackwell, vol. 62(2), pages 223-47, April.
  5. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers 70, C.E.P.R. Discussion Papers.
  6. Caillaud, B. & Jullien, B. & Picard, P., 1996. "Hierarchical organization and incentives," European Economic Review, Elsevier, vol. 40(3-5), pages 687-695, April.
  7. Quigley, John M. & Rubinfeld, Daniel L., 1996. "Federalism and Reductions in the Federal Budget," Berkeley Program on Housing and Urban Policy, Working Paper Series qt28h7485r, Berkeley Program on Housing and Urban Policy.
  8. Persson, Torsten & Tabellini, Guido, 1996. "Federal Fiscal Constitutions: Risk Sharing and Redistribution," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 979-1009, October.
  9. Ellingsen, Tore, 1998. "Externalities vs internalities: a model of political integration," Journal of Public Economics, Elsevier, vol. 68(2), pages 251-268, May.
  10. Lockwood, B., 1998. "Distributive Politics and the Benefits of Decentralization," The Warwick Economics Research Paper Series (TWERPS) 513, University of Warwick, Department of Economics.
  11. Robert P. Inman & Daniel L. Rubinfeld, 1997. "Rethinking Federalism," Journal of Economic Perspectives, American Economic Association, vol. 11(4), pages 43-64, Fall.
  12. David De Meza & Ben Lockwood, 1998. "Does Asset Ownership Always Motivate Managers? Outside Options And The Property Rights Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 361-386, May.
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Citations

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Cited by:
  1. Toke Aidt & Jayasri Dutta, 2010. "Fiscal Federalism and Electoral Accountability," CESifo Working Paper Series 3022, CESifo Group Munich.
  2. Grüner, Hans Peter, 2007. "Protocol Design and (De-)Centralization," CEPR Discussion Papers 6357, C.E.P.R. Discussion Papers.
  3. Staal, Klaas, 2006. "Incentives for separation and incentives for public good provision," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 104, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  4. Kessler, Anke & Luelfesmann, Christoph & Myers, Gordon M, 2009. "The Architecture of Federations: Constitutions, Bargaining, and Moral Hazard," CEPR Discussion Papers 7244, C.E.P.R. Discussion Papers.

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