Asymmetric decentralization: distortions and opportunities

none3This paper studies the interplay between central and local governments in defining the optimal degree of decentralization in terms of public goods supply. The choice between full centralization and asymmetric decentralization implies a trade-off between the possibility to provide public goods at a lower cost, wherever this is possible by decentralizing, and the possibility to fully internalize spillovers by full centralization. We find that asymmetric decentralization introduces distortions into the public decision-making process. We also demonstrate that the power to interfere in the central government’s ruling mechanisms should be reduced for the jurisdictions that have decentralized, in order to make their decentralization choice convenient even for the citizens in the less efficient jurisdictions. Finally, we find the conditions under which asymmetric decentralization can be simultaneously advantageous for both rich and poor regions through the design of appropriate equalization transfers.openFiorillo F.; Giuranno M.G.; Sacchi A.Fiorillo, F.; Giuranno, M. G.; Sacchi, A

Internal migration and public policy

This paper studies the relation between internal migration and public spending on public goods. We describe centralized public policy when a central government is comprised of elected representatives from local electoral districts. Internal migration determines the median voter in the districts. The median voters decide the equilibrium policy through bargaining. We find the conditions under which voters' mobility results in larger or smaller public spending. Furthermore, the distance between the actual size and the efficient size of government spending depends on the way internal migration changes the distribution of income within and between districts

Internal migration and public policy

This paper studies the relation between internal migration and public spending on public goods. We describe centralized public policy when a central government is comprised of elected representatives from local electoral districts. Internal migration determines the median voter in the districts. The median voters decide the equilibrium policy through bargaining. We find the conditions under which voters' mobility results in larger or smaller public spending. Furthermore, the distance between the actual size and the efficient size of government spending depends on the way internal migration changes the distribution of income within and between districts

Inter-jurisdictional migration and the size of government

This paper develops a model of centralized public spending where decision-makers are the regional median voters instead of the national median voter of the received literature. Regional representatives decide the level of public spending by bargaining in the central legislature. We study how exogenous changes in the composition of the regional electorate either deteriorate or mitigate inter-jurisdictional redistributive conflicts and how these, in turn, influence the size of the government. We find the conditions under which migration-induced inter-regional income convergence (divergence) leads either to a bigger or a smaller government. Finally, the relationship between migration and efficiency is explored within the present framework

Inter-jurisdictional migration and the size of government

This paper develops a model of centralized public spending where decision-makers are the regional median voters instead of the national median voter of the received literature. Regional representatives decide the level of public spending by bargaining in the central legislature. We study how exogenous changes in the composition of the regional electorate either deteriorate or mitigate inter-jurisdictional redistributive conflicts and how these, in turn, influence the size of the government. We find the conditions under which migration-induced inter-regional income convergence (divergence) leads either to a bigger or a smaller government. Finally, the relationship between migration and efficiency is explored within the present framework

Subsidy policies and vertical integration in times of crisis: Can two virtues produce an evil?

Vertical integration in an environment without foreclosure, or more generally without any mechanisms that restrict competition among firms, and subsidization of firms' production are two separate mechanisms that raise consumer welfare, and both have been proposed as antidotes to certain aspects of the current economic crisis caused by COVID-19. In this paper we show that the interplay of the two can, surprisingly, be harmful for consumers. We consider a two-layer imperfectly competitive industry where each downstream firm purchases an input from its exclusive upstream supplier, in the presence of a welfare-maximizing government. We allow one (or more than one) of the downstream firms to integrate with its upstream counterpart and we identify two opposite resulting effects: on the one hand, integration alleviates the double marginalization problem and raises industry output and on the other, it alters the government's optimal subsidy policy in a way that reduces output. It turns out that the latter effect dominates the former and thus integration leads to lower market output and consumer surplus. This holds irrespective of the mode of downstream market competition (quantities or prices) or the nature of commodities (homogeneous or differentiated). It also holds when the fiscal policy of the government is subject to social costs. Our conclusions are in particular relevant to the current pandemic period which spurs heavy subsidization of firms and reformulation of firms' vertical relations

Legality rating and corporate efficiency: evidence from a conditional nonparametric frontier analysis

Promoting legality and productivity is a central issue in modern economies. In this paper, we investigate the implications of a public policy that aims at achieving these goals through the adoption of the so-called legality rating (LR). The latter reduces corporate risk uncertainty by abating asymmetric information between companies that use good legal, fiscal and ethical practices and the credit system. We match companies whose legal and ethical practices have been certified by the Italian government-through the assignment of the LR-with a sample of unrated firms, and apply recent advances in nonparametric frontier analysis to assess the economic performance. We highlight a positive relationship between legality rating and firms' production efficiency. Our findings also show that legality rating policy is an effective tool to enhance inter-regional technological catching-up of businesses

Subsidy policies and vertical integration in times of crisis: Can two virtues produce an evil?

Vertical integration in an environment without foreclosure, or more generally without any mechanisms that restrict competition among firms, and subsidization of firms' production are two separate mechanisms that raise consumer welfare, and both have been proposed as antidotes to certain aspects of the current economic crisis caused by COVID-19. In this paper we show that the interplay of the two can, surprisingly, be harmful for consumers. We consider a two-layer imperfectly competitive industry where each downstream firm purchases an input from its exclusive upstream supplier, in the presence of a welfare-maximizing government. We allow one (or more than one) of the downstream firms to integrate with its upstream counterpart and we identify two opposite resulting effects: on the one hand, integration alleviates the double marginalization problem and raises industry output and on the other, it alters the government's optimal subsidy policy in a way that reduces output. It turns out that the latter effect dominates the former and thus integration leads to lower market output and consumer surplus. This holds irrespective of the mode of downstream market competition (quantities or prices) or the nature of commodities (homogeneous or differentiated). It also holds when the fiscal policy of the government is subject to social costs. Our conclusions are in particular relevant to the current pandemic period which spurs heavy subsidization of firms and reformulation of firms' vertical relations

Managerial accountability under yardstick competition

Two well-known mechanisms for enhancing managers' accountability are yardstick competition and internal monitoring. Yardstick competition puts managers in direct competition when firms make decisions for re-appointment (Tirole, 2006). Monitoring is used by firms to detect managers' rent-seeking activities. While common wisdom suggests that the joint use of the two means would reinforce each other in promoting managers’ good practices, we find that their interplay distorts managers' behavior who may end up acting in a less accountable way. Furthermore, differences in monitoring across firms bias that distortion, yielding even more counterintuitive results