Distributive Politics and the Costs of Centralisation

This paper studies the choice between centralisation and decentralisation of ...scal policy in a political economy setting. With centralisation, regional delegates vote over agendas comprising sets of region-speci...c projects. The outcome is ine¢cient because the choice of projects is insu¢ciently sensitive to within-region bene...ts. The number of projects funded may be non-monotonic in the strength of project externalities. The e¢ciency 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 e¢ciency gain from decentralization.