Endogenous spillovers in the trade-off between centralization and decentralization

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.