Oates' Decentralization Theorem and Public Governance

Abstract

Oates' decentralization theorem (Oates [20]) grounds on the assumption that the central government is incapable to discriminate public policy on a regional basis. This assumption has sometimes been justified by some informational advantage of local governments about the social and economic features of regions (Oates [21]). Under the Revelation principle, asymmetric information cannot be proved to be sufficient to explain why the central government does not replicate the allocation of local governments, when governments are benevolent. Moreover, empirical analysis seems to prove that central policies are not uniform across countries. On the basis of a stylized model of public sector governance with self-interested policy-makers, this paper proves that centralization and decentralization are equivalent (Weak Decentralization Theorem), whenever informational spillovers across regions are assumed away.

Keywords: Decentralization, Adverse selection, Public sector governance

JEL Classification: D72, D73, D82, H11, H70