Keywords: Federalism, Grants, Poltical
Bargainig, Incomplete
Contracts
JEL-Classification: D 87, H23, H77
The
paper studies a world where a region provides essential inputs for the
successful implementation of a local public policy project with
spill-overs, and where bargaining between different levels of government may ensure efficient decision making ex
post. We ask whether the authority over the public policy measure
should rest with the local government or be centralized. We show that centralization is always dominant when governments are
benevolent, and that otherwise both governance structures are
inefficient if political bargaining is disregarded. With bargaining, however, the first best can often be achieved under
decentralization, but not under centralization. At the root of the
result is the alignment of decision making over both essential inputs and final project size under decentralization.
Copyright 2004
© A. Kessler