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Should Different People Have Different Governments?

Author

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  • Federico Boffa

    (Free University of Bolzano‐Bozen, Faculty of Economics and Management)

  • Amedeo Piolatto

    (Universitat de Barcelona)

  • Giacomo Ponzetto

    (CREI, Universitat Pompeu Fabra, and Barcelona GSE)

Abstract

The classic theory of scal federalism suggests that different people should have different governments. Yet, separate local governments with homogeneous constituents often end up doing poorly. This paper explains why and answers three questions: when regions are heterogeneous, what determines if power should be centralized or decentralized? How many levels of government should there be? How should state borders be drawn? We develop a model of political agency in which voters differ in their ability to monitor rent-seeking politicians. We find that rent extraction is a decreasing but convex function of the share of informed voters, because voter information improves monitoring but also reduces the appeal of holding office. As a consequence, information heterogeneity makes centralization appealing as a way of reducing rent extraction. Conversely, taste heterogeneity prompts decentralization as a way of matching local preferences. We also explain why the proliferation of government tiers harms efficiency. We find economies of scope in accountability: a single government in charge of many policies has better incentives than many special-purpose governments splitting its budget. Thus, a federal system is desirable only if information varies enough across regions. Our model implies that optimal borders should cluster by tastes but also ensure diversity of information. Quantitatively, our fi ndings suggest excessive government fragmentation in the United States.

Suggested Citation

  • Federico Boffa & Amedeo Piolatto & Giacomo Ponzetto, 2015. "Should Different People Have Different Governments?," BEMPS - Bozen Economics & Management Paper Series BEMPS30, Faculty of Economics and Management at the Free University of Bozen.
  • Handle: RePEc:bzn:wpaper:bemps30
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    11. Eguia, Jon X. & Nicolo, Antonio, 2019. "Information and targeted spending," Theoretical Economics, Econometric Society, vol. 14(2), May.
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    15. Amrita Dhillon & Pramila Krishnan & Manasa Patnam & Carlo Perroni, 2020. "Secession with Natural Resources," Economic Journal, Royal Economic Society, vol. 130(631), pages 2207-2248.
    16. Jaume Ventura, 2019. "Sharing a government," Economics Working Papers 1664, Department of Economics and Business, Universitat Pompeu Fabra.
    17. Jaume Ventura, 2019. "Sharing Government," Working Papers 1112, Barcelona Graduate School of Economics.
    18. Edward L. Glaeser, 2012. "Urban Public Finance," NBER Working Papers 18244, National Bureau of Economic Research, Inc.
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    20. Bo, Shiyu, 2020. "Centralization and regional development: Evidence from a political hierarchy reform to create cities in china," Journal of Urban Economics, Elsevier, vol. 115(C).
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    More about this item

    Keywords

    federalism; government accountability; imperfect information; interregional heterogeneity; elections;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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