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Endogenous spillovers in the trade-off between centralization and decentralization

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  • Julio, Paulo
  • Peralta, Susana

Abstract

In this paper, we revisit the classical trade-o between centralized and decentralized provision of local public goods, in a setting where in- terregional spillovers depend on the level of a national public good. We compare the standard benevolent planner approach with a political econ- omy in which decisions, in a centralized system, are undertaken by a non-cooperative legislature with no separation of powers. We observe that the policy-maker in a centralized system is able to play both with local public goods and spillovers, a mechanism that is not available un- der a decentralized system. When compared to the traditional exogenous spillovers assumption, this improves the case for centralization under the standard benevolent planner approach. However, the same is not neces- sarily true in the non-cooperative legislature, as in this case the interests of the legislator do not need to be aligned with those of the society. Fi- nally, we extend the traditional political economy analysis by considering a legislature in which decisions are undertaken by di erent committees (separation of powers), and show that it performs better than the original non-cooperative legislature, greatly improving the case for centralization. JEL codes: D70, H11, H41, H70

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Paper provided by Universidade Nova de Lisboa, Faculdade de Economia in its series FEUNL Working Paper Series with number wp538.

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Length: 44 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:unl:unlfep:wp538

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  1. Panizza, Ugo, 1999. "On the determinants of fiscal centralization: Theory and evidence," Journal of Public Economics, Elsevier, vol. 74(1), pages 97-139, October.
  2. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416.
  3. Oliver Koppel, 2005. "Reviewing Oates' insights in a repeated game setting," Economics of Governance, Springer, vol. 6(3), pages 229-243, November.
  4. Guillaume Cheikbossian, 2000. "Federalism, distributive politics and representative democracy," Economics of Governance, Springer, vol. 1(2), pages 105-122, 07.
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