Should Different People Have Different Governments?

Giacomo Ponzetto, Amedeo Piolatto and Federico Boffa

No 1015, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies fiscal federalism when regions differ in voters' ability to monitor public officials. We develop a model of political agency in which rent-seeking politicians provide public goods to win support from heterogeneously informed voters. In equilibrium, voter information increases government accountability but displays decreasing returns. Therefore, political centralization reduces aggregate rent extraction when voter information varies across regions. It increases welfare as long as the central government is required to provide public goods uniformly across regions. The need for uniformity implies an endogenous trade off between reducing rents through centralization and matching idiosyncratic preferences through decentralization. We find that a federal structure with overlapping levels of government can be optimal only if regional differences in accountability are sufficiently large. The model predicts that less informed regions should reap greater benefits when the central government sets a uniform policy. Consistent with our theory, we present empirical evidence that less informed states enjoyed faster declines in pollution after the 1970 Clean Air Act centralized environmental policy at the federal level.

Date: 2015
New Economics Papers: this item is included in nep-cdm, nep-env, nep-pol and nep-ure
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Related works:
Working Paper: Should Different People Have Different Governments? (2015)
Working Paper: Should Different People Have Different Governments? (2015)
Working Paper: Political centralization and government accountability (2015)
Working Paper: Centralization and accountability: Theory and evidence from the Clear Air Act (2013)
Working Paper: Centralization and Accountability: Theory and Evidence from the Clean Air Act (2012)
Working Paper: Centralization and accountability: theory and evidence from the Clean Air Act (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:1015

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