Allocation of authority under central grants

Abstract

This study deals with an analysis of allocation of government authority between local and central governments. Using a relatively simple model, we examine three classes of issues: First, what type of public project is implemented under a (de)centralized system? Second, is the size of governments (or public projects) larger or smaller when the system is (de)centralized? Third, should the system be (de)centralized? Which level of government should be allocated an authority? The most interesting result of the analysis is that the optimal allocation of authority varies with the cost differential between local and central government in a non-monotonic way.