Distributive Politics and the Costs of Centralization

This paper studies the choice between centralization and decentralization of fiscal policy in a political economy setting. With centralization, regional delegates vote over agendas comprising sets of regionspecific projects. The outcome is inefficient because the choice of projects is insufficiently sensitive to within-region benefits. The number of projects funded may be non-monotonic in the strength of project externalities. The efficiency gains from decentralization, and the performance of “constitutional rules” (such as majority voting) which may be used to choose between decentralization and centralization, are then discussed in this framework. Weaker externalities and more heterogeneity between regions need not increase the efficiency gain from decentralization.