On Fiscal Federalism under Democracy
In his seminal work on fiscal federalism, Oates (1972) addressed the socalled Decentralization Theorem, which states that, if such factors as scale economies and spillovers are left out of consideration, a decentralized system is always more efficient than a centralized system for the supply of local public goods. Based on his analytical framework, we contrarily show that a centralized system is at times more efficient than a decentralized system under a democratic decision rule (Proposition 2). The key to such a possibility is the interests of minorities that may be sacrificed in each lower district under decentralization. That is, when the majority adopts an extreme policy that is far from minorities' tastes in a lower district under decentralization, if instead a moderate policy which is closer to minorities' tastes were chosen under centralization, then the interests of minorities would be saved. As a result, centralization could attain higher social welfare than decentralization.
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- Besley, Timothy J. & Coate, Stephen, 2000.
"Centralized versus Decentralized Provision of Local Public Goods: a Political Economy Analysis,"
CEPR Discussion Papers
2495, C.E.P.R. Discussion Papers.
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- Nobuo Akai & Toshihiro Ihori, 2002. "Central government subsidies to local public goods," Economics of Governance, Springer, vol. 3(3), pages 227-239, November.
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- Alberto Alesina & Enrico Spolaore, 1995.
"On the Number and Size of Nations,"
NBER Working Papers
5050, National Bureau of Economic Research, Inc.
- Ellingsen, Tore, 1998. "Externalities vs internalities: a model of political integration," Journal of Public Economics, Elsevier, vol. 68(2), pages 251-268, May.
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