Stackelberg Provision of Local Public Goods under the Decentralization System

Abstract

Generally, it is not socially efficient for the provision of local public goods in a system of competing regional jurisdictions, because local public goods have spillover effect. However, the provision of local public goods which involves the free mobile individuals is Pareto optimal. Though only maximizing the utility of their own residents, regional governments perfectly internalize the externalities associated with their provision of public goods by taking the free mobile individuals into consideration. The implication is that there is no role for a national authority in either providing interregional transfers or correcting for decentralized provision of public goods. These analysis are characterized by Nash equilibrium.This paper examines the provision of local public goods which are characterized by Stackelberg equilibrium-one local government is Stackelberg leader, the other is Stackelberg follower. The result of this analysis is that Stackelberg equilibrium is not always Pareto optimal and there is a possibility of the free rider problem. This means achieving a Pareto optimal will require intervention by a national authority.