Building Bridges: Heterogeneous Jurisdictions, Endogenous Spillovers, and the Benefits of Decentralization

Paulo Júlio and Susana Peralta ()

No 27, GEE Papers from Gabinete de Estratégia e Estudos, Ministério da Economia

Abstract: We model two heterogeneous districts of unequal size that may enjoy each other's local public good if a costly national infrastructure (the bridge) is provided. We compare a decentralized regime where local public goods are decided locally and the bridge centrally, with a centralized regime where all decisions are taken centrally, under both benevolent planner and median voter decision making. In both cases, it may happen that either both regimes build the bridge, none, or only one does. We provide a full-edged welfare comparison of all the possibilities. When the bridge is built in both regimes, centralization dominates if the spillovers allowed by the bridge are sufficiently high. When the bridge is not built in the centralized regime, decentralization is always preferred. We also show that, under some circumstances, it may happen that decentralization dominates even if it does not build the bridge, while the centralized regime does. Finally, we suggest a simple mechanism to avoid the costs imposed by the centralized regime upon minorities: allocating decision power over the local public goods and the bridge to different local constituents.

Keywords: Local public goods; Endogenous Spillovers; Fiscal (de)centralization. (search for similar items in EconPapers)
JEL-codes: D70 H11 H41 H70 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2010-12, Revised 2010-12
New Economics Papers: this item is included in nep-geo and nep-ure
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https://www.gee.gov.pt/RePEc/WorkingPapers/GEE_PAPERS_27.pdf First version, 2010 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:mde:wpaper:0027

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