Decentralization and spillovers: A new role for transportation infrastructure

Abstract

Inter-regional spillovers of local public goods are the main cause of decentralization failure. Assuming that the quality of transportation infrastructure policy affects the strength of inter-regional spillovers, we compare a one-step scheduling design, in which all policies are chosen simultaneously, with a two-step scheduling design, in which transportation infrastructure policy is used to influence local public goods policies. We show that decentralization failure could be partially solved with scheduling design. When regional governments correctly schedule their policies, citizens benefit from the same level of public goods but with lower taxes. Moreover, the two-step scheduling design results in a lower quality of transportation infrastructure and a higher intensity of local public goods. However, the overproduction of local public goods with positive externalities cannot be excluded.