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Building Bridges: Heterogeneous Jurisdictions, Endogenous Spillovers, and the Benefits of Decentralization

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Author Info

  • Paulo Júlio

    ()
    (Gabinete de Estratégia e Estudos, Ministry of Economy, Innovation and Development)

  • Susana Peralta

    ()
    (Faculdade de Economia, Universidade Nova de Lisboa, CORE-UCL and CEPR.)

Abstract

We model two heterogeneous districts of unequal size that may enjoy each other's local public good if a costly national infrastructure (the bridge) is provided. We compare a decentralized regime where local public goods are decided locally and the bridge centrally, with a centralized regime where all decisions are taken centrally, under both benevolent planner and median voter decision making. In both cases, it may happen that either both regimes build the bridge, none, or only one does. We provide a full-edged welfare comparison of all the possibilities. When the bridge is built in both regimes, centralization dominates if the spillovers allowed by the bridge are sufficiently high. When the bridge is not built in the centralized regime, decentralization is always preferred. We also show that, under some circumstances, it may happen that decentralization dominates even if it does not build the bridge, while the centralized regime does. Finally, we suggest a simple mechanism to avoid the costs imposed by the centralized regime upon minorities: allocating decision power over the local public goods and the bridge to different local constituents.

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File URL: http://www.gee.min-economia.pt/RePEc/WorkingPapers/gee_papers_27.pdf
File Function: First version, 2010
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Bibliographic Info

Paper provided by Gabinete de Estratégia e Estudos, Ministério da Economia e da Inovação in its series GEE Papers with number 0027.

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Length: 34 pages
Date of creation: Dec 2010
Date of revision: Dec 2010
Handle: RePEc:mde:wpaper:0027

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Keywords: Local public goods; Endogenous Spillovers; Fiscal (de)centralization.;

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  1. Rubinchik-Pessach, Anna, 2005. "Can decentralization be beneficial?," Journal of Public Economics, Elsevier, vol. 89(7), pages 1231-1249, July.
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