Devolution and grant-in-aid design for the provision of impure public goods.

Laura Levaggi,Rosella Levaggi

doi:10.1186/s40064-016-1919-9

Laura Levaggi, Rosella Levaggi

Open Access

https://doi.org/10.1186/s40064-016-1919-9

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Abstract

Traditional fiscal federalism theory postulates that devolution for the provision of local public goods increases welfare. However, most of the services offered at local level are local impure public goods whose characteristics may prevent devolution from being efficient. Our paper shows that devolution is the optimal choice only for local impure public goods. For an environment characterised by coordination and asymmetry of information problems, we propose the optimal grants-in-aid formula that Central Government should use to reduce welfare losses and we compare it with what suggested by the mainstream literature. Finally, we show under which conditions devolution should be preferred to a centralised solution. From a policy point of view, our paper may explain the heterogeneity in the choices made by countries in terms of devolution in the provision of merit and impure public goods.

Highlights

The process of decentralisation in decision making has received increasing attention in the past few years
This is the first result of our model: the findings of the traditional literature on fiscal federalism are valid for the provision of impure public goods, provided that there are no spillovers among regions
This paper studies the conditions under which devolution is a second best choice for the provision of goods and services are impure public goods with spillovers

Summary

Background

The process of decentralisation in decision making has received increasing attention in the past few years. In all the other cases, the subsidy is too low, total quantity falls short of the optimal level, and the welfare level attained is lower than in FB This is the first result of our model: the findings of the traditional literature on fiscal federalism are valid for the provision of impure public goods, provided that there are no spillovers among regions. LG decision has a twofold impact on total welfare: on the revenue side it will change the national tax rate; on the expenditure side it will alter the quantity of the impure public good This is one of the novel elements of our model: given the nature of y, each LG has to foresee the behaviour of the other local authority and should take into account the impact of increasing its expenditure.

13 In fact

Findings

Conclusions