Abstract
This paper studies the efficiency of decentralized leadership in federal settings in which selfish regional governments provide regional and federal public goods and the benevolent central government implements interregional earmarked and income transfers. In the simpler model without residential mobility, unlimited decentralized leadership is efficient only if the center implements redistributive interregional income and earmarked transfers to equate consumption of private and regional public goods across regions. Such policies perfectly align the incentives of the selfish regional governments. In the extended model with imperfect residential mobility, due to regional attachment, decentralized leadership is efficient if the center adopts the redistributive interregional income and earmarked policies and there is a common labor market in the federation.
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Notes
- 1.
- 2.
See Cornes and Itaya (2010) for an interesting study of voluntary contributions to multiple pure public goods. The authors show that the provision levels in equilibrium are too low (relative to efficient levels), among other things.
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The Inada conditions guarantee that both regions are populated in equilibrium.
- 5.
For simplicity, I omit rental income sources that residents obtain from supplying fixed inputs (say, land and capital) in the market. If each resident of region i is endowed with equal supplies of region i’s fixed resources, equation (28) would remain the same: the rental incomes would exactly cancel out with the amounts spent by the firms to hire such resources. Thus, the analysis in the text is consistent with the assumption that regional residents are equally endowed with all regional resources.
- 6.
Silva and Lucas (2016) show that the subgame perfect equilibrium for the decentralized leadership game is the same whether government authorities take migration responses into account or consider the population distribution as given. To simplify exposition, the government authorities take the population distribution as given in the current setting.
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Silva, E.C.D. (2017). Decentralized Leadership. In: Buchholz, W., Rübbelke, D. (eds) The Theory of Externalities and Public Goods. Springer, Cham. https://doi.org/10.1007/978-3-319-49442-5_9
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DOI: https://doi.org/10.1007/978-3-319-49442-5_9
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