Can we leave road pricing to the regions? The role of institutional constraints

In most federal countries, the pricing of road use is still largely decided at the federal level, and often takes the form of fuel taxes. Recently, however, (urban) road pricing and (regional) distance charging have gained momentum, increasing opportunities for decentralized decision-making. In this paper we use a political economy model to analyze under what conditions the pricing of roads can better be left to the regions. We use a two-region model that allows for spill-overs between regions, it takes into account congestion, and it captures demand heterogeneity both between and within regions. At the regional level, decisions are taken by majority voting; at the federal level, elected regional representatives decide on charges for road use. We start from the observation, shown in earlier literature, that decentralized political decisions will under most plausible conditions yield higher welfare than federal decisions. We then show the following results. First, there are two institutional settings that necessarily improve the performance of federal decisions: (i) requiring uniform prices across regions, and (ii) legislative bargaining, whereby federal decisions are the result of negotiations between regional representatives. Second, under these constraints, federal decisions may easily outperform decentralization; this will be the case when users of the congestible good have large political majorities and there are substantial spill-overs across regions. Third, the model explains why in some, but not all, circumstances such institutions may automatically develop. Specifically, if regions are symmetric and drivers have a majority in both regions, we show that they will voluntarily transfer power to the federal level if a uniform pricing constraint is constitutionally imposed. However, if drivers have a majority in one region only, the region where non-users have a majority will never agree to transfer decision power to the federal level. We argue that these results are consistent with empirical observations.