Revisiting the “Decentralization Theorem” – On the Role of Externalities

Marko Köthenbürger
Authors registered in the RePEc Author Service: Marko Koethenbuerger

No 2128, CESifo Working Paper Series from CESifo

Abstract: The “Decentralization Theorem” (Oates, 1972) is central to the discussion of fiscal federalism. We revisit the role of consumption spillovers in evaluating the merits of (de)centralization. Unlike the general prediction, a higher degree of spillovers may reduce the difference in utility of centralization and decentralization. The non-monotonicity result relates to the difference in expenditures on public consumption. Provided decentralized choices yield higher levels of public expenditure, a rise in the amount of spillovers allows residents to enjoy larger gains in public consumption (and thereby utility) under decentralization relative to centralization.

Keywords: federalism; decentralization theorem; externality; policy uniformity (search for similar items in EconPapers)
JEL-codes: H10 H30 H70 (search for similar items in EconPapers)
Date: 2007
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Journal Article: Revisiting the "Decentralization Theorem"--On the role of externalities (2008)
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