Free-riding or Internalizing? An Opportunistic View on Decentralization versus Centralization
The aim of the paper is to analyze a model of local public good provision with positive interjurisdictional spillovers comparing decentralized and centralized system. As in the recent Second Generation Theory (SGT) of fiscal federalism (Seabright 1996; Lockwood 2002, 2006; Besley and Coate 2003; Weingast 2009), we also adopt a political economy approach, assuming different behaviours of political leaders (Leviathan and non-Leviathan). The main contribution of the paper is to consider two relevant aspects neglected by the political economy models: the size of local jurisdictions and the explicit definition of the rent-seeking behaviour. Moreover, modelling interregional externalities as a mechanism contributing to lowering the production cost of the public good in each region, a different trade-off - from the traditional and new theory of fiscal federalism - is proposed in order to compare decentralized versus centralized solution: the gains from internalizing externalities and the losses of freeriding advantages, which may differ with regional size and preferences for the public good. Given this general framework, the convenience of decentralization versus centralization mainly depends on the interaction among these factors: i) the free-riding gains exploiting positive externalities; ii) the gains of internalizing externalities; iii) the degree of preferences heterogeneity; iv) the implicit transfers (“cross subsidization”) across different regions. To summarize, from a positive viewpoint, decentralization should not be necessarily pursued only in the absence of externalities, but also with high spillovers. The key insight of this result is represented by different size of regions, which may determine an asymmetry among citizens’ responses concerning the best institutional setting.
|Date of creation:||2011|
|Contact details of provider:|| Postal: Poschingerstrasse 5, 81679 Munich|
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Web page: http://www.cesifo-group.de
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416-416.
- Picard Pierre & Gilbert G, 1991.
"Incentives and the optimal size of local territories,"
CEPREMAP Working Papers (Couverture Orange)
- Picard, P. & Gilbert, G., 1992. "Incentives and the Optimal Size of Local Territories," Research Papers by the Institute of Economics and Econometrics, Geneva School of Economics and Management, University of Geneva 92.12, Institut d'Economie et Econométrie, Université de Genève.
- Crémer, Jacques & Palfrey, Thomas, 1994.
"In or Out?: Centralization by Majority Vote,"
IDEI Working Papers
33, Institut d'Économie Industrielle (IDEI), Toulouse.
- Cremer, J. & Palfrey, T.R., 1994. "In or Out?: Centralization by Majority Vote," Papers 94.335, Toulouse - GREMAQ.
- Cremer, Jacques & Palfrey, Thomas R., "undated". "In or Out?: Centralization by Majority Vote," Working Papers 879, California Institute of Technology, Division of the Humanities and Social Sciences.
- SALMON, Pierre, 1987.
"Decentralization as an incentive scheme,"
Institut des Mathématiques Economiques – Document de travail de l’I.M.E. (1974-1993)
98, Institut des Mathématiques Economiques. LATEC, Laboratoire d'Analyse et des Techniques EConomiques, CNRS, Université de Bourgogne.
- Markusen, James R & Wigle, Randall M, 1989. "Nash Equilibrium Tariffs for the United States and Canada: The Roles of Country Size, Scale Economies, and Capital Mobility," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 368-386, April.
- Ben Lockwood, 2002.
"Distributive Politics and the Costs of Centralization,"
Review of Economic Studies,
Oxford University Press, vol. 69(2), pages 313-337.
- Lockwood, Ben, 1998. "Distributive Politics and the Costs of Centralization," CEPR Discussion Papers 2046, C.E.P.R. Discussion Papers.
- Jeremy Edwards & Michael Keen, 1994.
"Tax competition and Leviathon,"
IFS Working Papers
W94/07, Institute for Fiscal Studies.
- Gilbert, Guy & Picard, Pierre, 1996. "Incentives and optimal size of local jurisdictions," European Economic Review, Elsevier, vol. 40(1), pages 19-41, January.
- Conley, John & Dix, Manfred, 1999. "Optimal and Equilibrium Membership in Clubs in the Presence of Spillovers," Journal of Urban Economics, Elsevier, vol. 46(2), pages 215-229, September.
- Patrick Bolton & Gérard Roland, 1997. "The Breakup of Nations: A Political Economy Analysis," The Quarterly Journal of Economics, Oxford University Press, vol. 112(4), pages 1057-1090.
- Robert Dur & Klaas Staal, 2007.
"Local Public Good Provision, Municipal Consolidation, and National Transfers,"
CESifo Working Paper Series
2061, CESifo Group Munich.
- Dur, Robert & Staal, Klaas, 2008. "Local public good provision, municipal consolidation, and national transfers," Regional Science and Urban Economics, Elsevier, vol. 38(2), pages 160-173, March.
- Dur, Robert & Staal, Klaas, 2006. "Local Public Good Provision, Municipal Consolidation, and National Transfers," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 86, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
- Yingyi Qian & Barry R. Weingast, 1997.
"Federalism as a Commitment to Preserving Market Incentives,"
97042, Stanford University, Department of Economics.
- Yingyi Qian & Barry R. Weingast, 1997. "Federalism as a Commitment to Reserving Market Incentives," Journal of Economic Perspectives, American Economic Association, vol. 11(4), pages 83-92, Fall.
- Paolo Liberati, 2011. "“Which Tax” or “Which Tax for What?”: Tax Assignment in the Theory of Fiscal Federalism," Public Finance Review, SAGE Publishing, vol. 39(3), pages 365-392, May.
- Weingast, Barry R., 2009. "Second generation fiscal federalism: The implications of fiscal incentives," Journal of Urban Economics, Elsevier, vol. 65(3), pages 279-293, May.
- Alberto Alesina & Enrico Spolaore, 1997.
"On the Number and Size of Nations,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 112(4), pages 1027-1056.
- Breton, Albert, 1987. "Towards a theory of competitive federalism," European Journal of Political Economy, Elsevier, vol. 3(1-2), pages 263-329.
When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_3328. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Klaus Wohlrabe)
If references are entirely missing, you can add them using this form.