Revisiting the “Decentralization Theorem” – On the Role of Externalities
AbstractThe “Decentralization Theorem” (Oates, 1972) is central to the discussion of fiscal federalism. We revisit the role of consumption spillovers in evaluating the merits of (de)centralization. Unlike the general prediction, a higher degree of spillovers may reduce the difference in utility of centralization and decentralization. The non-monotonicity result relates to the difference in expenditures on public consumption. Provided decentralized choices yield higher levels of public expenditure, a rise in the amount of spillovers allows residents to enjoy larger gains in public consumption (and thereby utility) under decentralization relative to centralization.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2128.
Date of creation: 2007
Date of revision:
federalism; decentralization theorem; externality; policy uniformity;
Other versions of this item:
- Koethenbuerger, Marko, 2008. "Revisiting the "Decentralization Theorem"--On the role of externalities," Journal of Urban Economics, Elsevier, vol. 64(1), pages 116-122, July.
- H10 - Public Economics - - Structure and Scope of Government - - - General
- H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
- H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
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