On the optimal allocation of responsibilities among national and subnational governments

Shani, Ron and Reingewertz, Yaniv (2024): On the optimal allocation of responsibilities among national and subnational governments.

Abstract

This paper introduces a model for optimizing the provision of local public goods across national, regional, and local government tiers. We study how spillovers, heterogeneity of preferences, and economies of scale affect the decision to centralize or decentralize responsibilities among these three tiers of government. We provide three key insights – (a) Adding a regional level to the standard fiscal federalism model creates a subnational solution for the problem of spillovers between local governments, (b) Preference heterogeneity creates an incentive to decentralize the provision of local public goods, (c) Economies of scale create an efficiency gain from centralization. The ultimate distribution of responsibilities is contingent upon the interplay of these three competing forces. Our model integrates insights from previous studies to develop a unified theory encompassing the powers that influence decisions to centralize or decentralize.

• Item Type: MPRA Paper
• Language: English
• Keywords: Fiscal Federalism; subnational governments, decentralization, local public goods
• Subjects: H - Public Economics > H1 - Structure and Scope of Government > H11 - Structure, Scope, and Performance of Government; H - Public Economics > H4 - Publicly Provided Goods > H41 - Public Goods; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H77 - Intergovernmental Relations ; Federalism ; Secession; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R1 - General Regional Economics > R13 - General Equilibrium and Welfare Economic Analysis of Regional Economies

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