Why Does Centralisation Fail to Internalise Policy Externalities?

Tinbergen Institute Working Paper No. 2002-056/3

21 Pages Posted: 19 Jul 2002

See all articles by Robert Dur

Robert Dur

Erasmus University Rotterdam (EUR) - Department of Economics; Tinbergen Institute; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Hein J. Roelfsema

Utrecht University - School of Economics

Date Written: 2002

Abstract

Centralisation of political decision making often fails to produce the desired results. For instance, it is frequently argued that decision making within the European Union results in overspending and overregulation in some policy areas, while too low spending and too little regulation prevails in other policy areas. In this paper, we study a model in which delegates from jurisdictions bargain over the amounts of public goods provided by jurisdictions. Following Besley and Coate (2000) we show that local policy makers have an incentive to delegate bargaining to 'public good lovers' if all the cost of public goods are shared through a common budget. Consequently, overprovision of public goods results. If a sufficiently large part of the cost of public goods can not be shared among regions, underprovision of public goods persists under centralised decision making because local policy makers delegate bargaining to 'conservatives'. Underprovision is strongest when spillover effects are moderate: both in the absence of spillover effects and in the case of global public goods, centralised decision making produces the social optimum. Finally, we study financing rules that may help to avoid strategic delegation by local policy makers.

Keywords: Centralised decision making, strategic delegation, financing rules

JEL Classification: D72, D78, H11, H41

Suggested Citation

Dur, Robert and Roelfsema, Hein J., Why Does Centralisation Fail to Internalise Policy Externalities? (2002). Tinbergen Institute Working Paper No. 2002-056/3, Available at SSRN: https://ssrn.com/abstract=316762 or http://dx.doi.org/10.2139/ssrn.316762

Robert Dur (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Economics ( email )

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HOME PAGE: http://people.few.eur.nl/dur

Tinbergen Institute

Amsterdam/Rotterdam
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CESifo (Center for Economic Studies and Ifo Institute)

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IZA Institute of Labor Economics

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Hein J. Roelfsema

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
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Utrecht, 3584 EC
Netherlands

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