Samuelson Meets Federalism: Local Production of a National Public Good

Abstract

This paper studies an overlooked phenomenon in the provision of public goods: local produc-tion of a national public good, such as the manufacture of fighter planes (which contribute to national defense) in many different jurisdictions across the country. Because local production of the national good raises local incomes, each jurisdiction seeks to raise its share of the good’s production. A subset of jurisdictions then forms a minimum winning coalition, which offers equal production shares to its members and smaller (possibly zero shares) to non-members, while choosing the provision level of the national good. The outcome is inefficient, with produc-tion inefficiently concentrated and the public good also overprovided (because income benefits reducing the good’s perceived marginal cost). Empirical results confirm the prediction that the location of production is important in determining Congressional support for federal program spending.

JEL Classification: H100, H110