The Decentralization Tradeoff for Complementary Spillovers

IES Working Paper No. 13/2011

34 Pages Posted: 3 Jan 2012  

Martin Gregor

Charles University Prague

Lenka Stastna

affiliation not provided to SSRN

Date Written: April 30, 2011

Abstract

We examine a symmetric two-district setting with spillovers of local public spending where a spill-in from the foreign spending is not a substitute, but a complement to domestic spending. Specifically, we assume production of two district-specific public goods out of two complementary district-specific inputs. We compare equilibria in non-cooperative decentralization and cooperative centralization for different spillovers, complementarities and cost-division rules, and control for the effects of strategic delegation and the feasibility of voluntary contributions to the input in the foreign district. We find that centralization welfare - dominates decentralization in most institutional settings and for a wide range of parameters, yet we can also identify necessary and sufficient conditions for decentralization to welfare - dominate centralization. The setup features three novelties: In the absence of transfers, welfare in decentralization increases in spillovers, strategic delegation in decentralization improves welfare, and centralized provision may be non-monotonic in spillovers.

Keywords: spillover, spill-in, strategic complementarity, decentralization theorem, externality

JEL Classification: H41, H73, H77

Suggested Citation

Gregor, Martin and Stastna, Lenka, The Decentralization Tradeoff for Complementary Spillovers (April 30, 2011). IES Working Paper No. 13/2011. Available at SSRN: https://ssrn.com/abstract=1978727 or http://dx.doi.org/10.2139/ssrn.1978727

Martin Gregor (Contact Author)

Charles University Prague ( email )

Institute of Economic Studies
Opletalova 26
Prague, 11000
Czech Republic

HOME PAGE: http://ies.fsv.cuni.cz/en/staff/gregor

Lenka Stastna

affiliation not provided to SSRN

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