Influence Costs in the Provision of Local Public Goods
This paper studies federalism in a "menu auction" or common agency setting where influence costs depend on the heterogeneity of preferences over allowed policies. Though localized provision and uniformity constraints may preclude efficient policies, they reduce influence costs and may enhance welfare. Thus, the much-criticized, commonly-assumed uniformity restriction on central governments finds justification. Localized provision may be optimal even in the presence of spillovers. Higher spillovers from a jurisdiction reduce the welfare of its residents under local provision and have ambiguous effects under centralized provision. Uniformity constraints are better when individuals are mixed; local provision is complementary to sorting.
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