Abstract
A model of optimal territorial decentralization is presented in which smaller local governments have an informational advantage concerning public goods' production costs and the central government has imperfect information on spillover effects induced by local projects. The attention is focused on the optimal size of local entities and on the shape of transfer schedules from the central government to local jurisdictions. The optimal territorial organization is a compromise between small jurisdictions so as to benefit from the geographical proximity effect on information and large entities in which spillover effects are more easily internalized by means of linear or non-linear taxation schemes implemented by the Centre.
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