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Free-riding or Internalizing? An Opportunistic View on Decentralization versus Centralization

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Listed:
  • Fabio Fiorillo
  • Agnese Sacchi

Abstract

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.

Suggested Citation

  • Fabio Fiorillo & Agnese Sacchi, 2011. "Free-riding or Internalizing? An Opportunistic View on Decentralization versus Centralization," CESifo Working Paper Series 3328, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_3328
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp3328.pdf
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    References listed on IDEAS

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    1. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416-416.
    2. Ben Lockwood, 2002. "Distributive Politics and the Costs of Centralization," Review of Economic Studies, Oxford University Press, vol. 69(2), pages 313-337.
    3. Edwards, Jeremy & Keen, Michael, 1996. "Tax competition and Leviathan," European Economic Review, Elsevier, vol. 40(1), pages 113-134, January.
    4. 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.
    5. Salmon, Pierre, 1987. "Decentralisation as an Incentive Scheme," Oxford Review of Economic Policy, Oxford University Press, vol. 3(2), pages 24-43, Summer.
    6. Cremer, Jacques & Palfrey, Thomas R., 1996. "In or out?: Centralization by majority vote," European Economic Review, Elsevier, vol. 40(1), pages 43-60, January.
    7. Gilbert, Guy & Picard, Pierre, 1996. "Incentives and optimal size of local jurisdictions," European Economic Review, Elsevier, vol. 40(1), pages 19-41, January.
    8. 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.
    9. 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.
    10. 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.
    11. 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.
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    13. Picard Pierre & Gilbert G, 1991. "Incentives and the optimal size of local territories," CEPREMAP Working Papers (Couverture Orange) 9124, CEPREMAP.
    14. 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.
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    Citations

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    Cited by:

    1. Raimundo Soto & Ilham Haouas, 2012. "Has the UAE Escaped the Oil Curse?," Working Papers 728, Economic Research Forum, revised 2012.
    2. Fabio Fiorillo & Agnese Sacchi, 2012. "On Local Environmental Protection," EuroEconomica, Danubius University of Galati, issue 5(31), pages 28-42, December.
    3. Fabio Fiorillo & Agnese Sacchi, 2012. "The Political Economy of the Standard Level of Services: The Role of Income Distribution," CESifo Working Paper Series 3696, CESifo Group Munich.
    4. Costantini, Valeria & Mazzanti, Massimiliano & Montini, Anna, 2013. "Environmental performance, innovation and spillovers. Evidence from a regional NAMEA," Ecological Economics, Elsevier, vol. 89(C), pages 101-114.

    More about this item

    Keywords

    decentralization; spillovers; free-riding; rent-seeking behaviour; local public goods;

    JEL classification:

    • 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
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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