Influence Costs in the Provision of Local Public Goods

Abstract

Studies of federalism often assume that a central government's policy choices are exogenously restricted to be uniform across political subdivisions. Drawing from the literature on contracts and organization, this paper provides a justification for the much-criticized assumption. Though restrictions may reduce policy efficiency, they may reduce influence costs - resources used to influence policy - even more. The restrictions considered are on the central government's taxation and local public good provision in a menu auction lobbying framework, with localized provision a special case. When preferences and optimal policies are similar across jurisdictions, uniformity constraints enhance welfare. When spillovers are low, local provision is optimal. In other cases, uniformity restrictions reduce welfare as critics have stated.