When local public goods are provided by a centralized authority, spillovers may be coordinated, but heterogeneity in preferences may be suppressed. Besley and Coate (2003) have already solved this classic trade-off for a uniform tax regime. Here, we extend their approach by allowing for a non-uniform tax regime. We find that centralization with our tax system necessarily increases welfare in comparison to uniform-tax centralization. Importantly, with non-cooperative legislators coming from homogenous districts, our centralization dominates decentralization for any degree of spillovers. In other cases, it at least improves odds of centralization, if measured by utilitarian yardstick.
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Paper provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its series Working Papers IES with number
81.
Find related papers by JEL classification: H40 - Public Economics - - Publicly Provided Goods - - - General H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures P51 - Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems
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