The “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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Paper provided by CESifo GmbH in its series CESifo Working Paper Series with number
CESifo Working Paper No. 2128.
Find related papers by JEL classification: 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