Why does Centralisation fail to internalise Policy Externalities?

Abstract

We provide an explanation why centralisation of political decision makingresults in overspending in some policy domains, whereas too low spending persists in others.We study a model in which delegates from jurisdictions bargain over local public goods provision.If all of the costs of public goods are shared through a common budget, policy makersdelegate bargaining to ‘public good lovers’, resulting in overprovision of public goods. If asufficiently large part of the costs can not be shared, underprovision persists because policymakers delegate bargaining to ‘conservatives’. We derive financing rules that eliminate theincentives for strategic delegation