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Expenditure Decentralization and the Delivery of Public Services in Developing Countries

  • Pranab Bardhan
  • Dilip Mookherjee

This two-part paper provides a theoretical framework for appraising trade-offs between alternative methods of delegating authority over the delivery of public services, on the targeting and cost-effectiveness of public spending programs in developing countries. Authority over these programs has to be delegated owing to absence of information at the central level concerning local needs and costs of specific communities. In a top-down centralized system, this authority is delegated to bureaucrats by a central government that has limited ability to monitor their prerformance with respect to either service delivery or cost control. In a decentralized system, it is allocated instead to elected local governments or client groups, which may be subject to capture by locak elites. Both systems are thus prone to local corruption and lack of accountability. Part 1 of the paper studies the relevant tradeoffs in the context of a poverty alleviation program, whose aim is to deliver a private merit good available on competitive markets to the poor. Decentraliztion generally dominates with respect to inter-community targeting as well as cost-effectiveness. However, the ranking of intracommunity targeting under the two systems is ambiguous, and depends on the relative degree of capture that local and natinal governments are prone to, besides the nature of uncertainty and preferences of the good by the nonpoor. Part 2 of the paper considers and infrastructure service provided by a public enterprise which has a natural monopoly. In this context it is shown that decentralization dominates if the following four conditions are satisfied: (i) local governments are not vulnerable to capture; (ii) local governments have access to adequate local financing sources; (iii) there are no interjurisdictional externalities in service provision; and (iv) local governments have all the bargaining power and access to relevant cost information vis-a-vis public enterprise managers. Absent any one of these institutional conditions, however, decentralization may perform worse than centralization. The Appendix develops a model of electoral competition (adapted from Grossman-Helpman (1996)) where parties are prone to capture by special interest groups, which helps identify some of the institutional determinants of the degree of capture of local and central governments.

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Paper provided by Boston University, Institute for Economic Development in its series Boston University - Institute for Economic Development with number 90.

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Date of creation: Nov 1998
Date of revision:
Handle: RePEc:fth:bosecd:90
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  1. Banerjee, A.V., 1997. "A Theory of Misgovernance," Working papers 97-4, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Gerardo della Paolera & Alan M. Taylor, 1997. "Finance and Development in an Emerging Market: Argentina and the Interwar Period," NBER Working Papers 6236, National Bureau of Economic Research, Inc.
  3. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416.
  4. Abhijit V. Banerjee, 1997. "A Theory of Misgovernance," The Quarterly Journal of Economics, Oxford University Press, vol. 112(4), pages 1289-1332.
  5. Laffont, Jean-Jacques & Martimort, David, 1995. "Collusion and Delegation," IDEI Working Papers 54, Institut d'Économie Industrielle (IDEI), Toulouse.
  6. Seabright, Paul, 1994. "Accountability and Decentralization in Government: An Incomplete Contracts Model," CEPR Discussion Papers 889, C.E.P.R. Discussion Papers.
  7. Inman, Robert P. & Rubinfeld, Daniel L., 1996. "Designing tax policy in federalist economies: An overview," Journal of Public Economics, Elsevier, vol. 60(3), pages 307-334, June.
  8. Bardhan, Pranab, 1996. "Efficiency, Equity and Poverty Alleviation: Policy Issues in Less Developed Countries," Economic Journal, Royal Economic Society, vol. 106(438), pages 1344-56, September.
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