Effects of information incompleteness on provision of local public services by competitive local governments

Abstract

Distributive provision of local public goods by multiple local governments causes inefficiency that is inherent to the spillover effects of the goods. Moreover, preference on local public goods and services is usually private information. This asymmetric information, in addition to the spillover effects, brings about distorted results in overall service provision, especially when the non-full-information central government intervenes in local government competition by matching grant systems. This study analyzes the inefficiency effects of incompleteness of information about preferences over public facilities among different governments. The effects of intervention by the central government by revenue transfer (via a tax-subsidy system) are clarified.