Why does centralisation fail to internalise policy externalities? |
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Authors: | Robert Dur Hein Roelfsema |
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Affiliation: | 1. Tinbergen Institute, Department of Economics, Erasmus University Rotterdam, Rotterdam, 3000 DR, The Netherlands 2. Utrecht School of Economics, Utrecht University, The Netherlands
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Abstract: | We provide an explanation why centralisation of political decision making results in overspending in some policy domains, whereas too low spending persists in others. We study a model in which delegates from jurisdictions bargain over local public goods provision. If all of the costs of public goods are shared through a common budget, policy makers delegate bargaining to ‘public good lovers’, resulting in overprovision of public goods. If a sufficiently large part of the costs can not be shared, underprovision persists because policy makers delegate bargaining to ‘conservatives’. We derive financing rules that eliminate the incentives for strategic delegation. |
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