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Inefficient centralization of imperfect complements

If local public goods exhibit spillovers and regions are sufficiently symmetric, decentralization implies underprovision, whereas cooperative centralization is associated with strict Pareto-improvement. This classic inference rests on two assumptions: local politicians are delegated sincerely and never provide voluntary transfers to the other regions. We abandon these assumptions in a setup of two symmetric regions with imperfect complementarity between local public goods. For this particular aggregation, non-cooperative decentralization can achieve the social optimum, whereas cooperative centralization cannot.

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Paper provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its series Working Papers IES with number 2007/19.

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Length: 23 pages
Date of creation: Jun 2007
Date of revision: Jun 2007
Handle: RePEc:fau:wpaper:wp2007_19
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