Local Public Good Provision, Municipal Consolidation, and National Transfers
Erasmus University Rotterdam (EUR) - Department of Economics; Tinbergen Institute; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Institute for the Study of Labor (IZA)
Institute for International Economic Policy (IIW), University of Bonn
CESifo Working Paper No. 2061
We analyze a simple model of local public good provision in a region comprising two districts, a city and a village. When districts remain autonomous and local public goods have positive spillover effects on the neighboring district, there is underprovision of public goods in both the city and the village. When districts consolidate, underprovision persists in the village (and may become even more severe), whereas overprovision of public goods arises in the city as urbanites use their political power to exploit the villagers. From a social welfare point of view, inhabitants of the village have insufficient incentives to vote for consolidation. We examine how national transfers to local governments can resolve these problems.
Number of Pages in PDF File: 29
Keywords: local public goods, municipal consolidation, voting, intergovernmental transfers, tax discrimination
JEL Classification: D7, H2, H7, R5working papers series
Date posted: July 25, 2007
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