On the optimal allocation of responsibilities among national and subnational governments

Ron Shani and Yaniv Reingewertz

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Fiscal Federalism; subnational governments, decentralization, local public goods (search for similar items in EconPapers)
JEL-codes: H11 H41 H77 R13 (search for similar items in EconPapers)
Date: 2024-11-30
New Economics Papers: this item is included in nep-pbe and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:122835

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