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Free-riding or Internalizing? An Opportunistic View on Decentralization versus Centralization

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  • Fabio Fiorillo
  • Agnese Sacchi

Abstract

The aim of the paper is to analyze a model of local public good provision with positive interjurisdictional spillovers comparing decentralized and centralized system. As in the recent Second Generation Theory (SGT) of fiscal federalism (Seabright 1996; Lockwood 2002, 2006; Besley and Coate 2003; Weingast 2009), we also adopt a political economy approach, assuming different behaviours of political leaders (Leviathan and non-Leviathan). The main contribution of the paper is to consider two relevant aspects neglected by the political economy models: the size of local jurisdictions and the explicit definition of the rent-seeking behaviour. Moreover, modelling interregional externalities as a mechanism contributing to lowering the production cost of the public good in each region, a different trade-off - from the traditional and new theory of fiscal federalism - is proposed in order to compare decentralized versus centralized solution: the gains from internalizing externalities and the losses of freeriding advantages, which may differ with regional size and preferences for the public good. Given this general framework, the convenience of decentralization versus centralization mainly depends on the interaction among these factors: i) the free-riding gains exploiting positive externalities; ii) the gains of internalizing externalities; iii) the degree of preferences heterogeneity; iv) the implicit transfers (“cross subsidization”) across different regions. To summarize, from a positive viewpoint, decentralization should not be necessarily pursued only in the absence of externalities, but also with high spillovers. The key insight of this result is represented by different size of regions, which may determine an asymmetry among citizens’ responses concerning the best institutional setting.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3328.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3328

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Related research

Keywords: decentralization; spillovers; free-riding; rent-seeking behaviour; local public goods;

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References

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  1. Paolo Liberati, 2011. "“Which Tax” or “Which Tax for What?”: Tax Assignment in the Theory of Fiscal Federalism," Public Finance Review, , vol. 39(3), pages 365-392, May.
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  11. Lockwood, Ben, 2002. "Distributive Politics and the Costs of Centralization," Review of Economic Studies, Wiley Blackwell, vol. 69(2), pages 313-37, April.
  12. Yingyi Qian & Barry R. Weingast, 1997. "Federalism as a Commitment to Reserving Market Incentives," Journal of Economic Perspectives, American Economic Association, vol. 11(4), pages 83-92, Fall.
  13. Conley, John & Dix, Manfred, 1999. "Optimal and Equilibrium Membership in Clubs in the Presence of Spillovers," Journal of Urban Economics, Elsevier, vol. 46(2), pages 215-229, September.
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Citations

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Cited by:
  1. Costantini, Valeria & Mazzanti, Massimiliano & Montini, Anna, 2013. "Environmental performance, innovation and spillovers. Evidence from a regional NAMEA," Ecological Economics, Elsevier, vol. 89(C), pages 101-114.
  2. Fabio Fiorillo & Agnese Sacchi, 2012. "The Political Economy of the Standard Level of Services: The Role of Income Distribution," CESifo Working Paper Series 3696, CESifo Group Munich.
  3. Fabio Fiorillo & Agnese Sacchi, 2012. "On Local Environmental Protection," EuroEconomica, Danubius University of Galati, issue 5(31), pages 28-42, December.
  4. Ilham Haouas & Raimundo Soto, 2012. "Has the UAE Escaped the Oil Curse?," Documentos de Trabajo 412, Instituto de Economia. Pontificia Universidad Católica de Chile..

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