Central governance or subsidiarity: A property-rights approach to federalism |
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Authors: | Christoph Lü lfesmann |
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Affiliation: | Department of Economics, University of Bonn, Adenaueralle 24-42, 53113 Bonn, Germany |
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Abstract: | We consider a model where one region in a federation can realize a public project after undertaking value-increasing investments. While negotiations on the federal level ensure that an efficient project size is implemented in equilibrium, non-contractibility of investments causes the overall outcome to differ across regimes. If the region bears the entire implementation costs of its policies, underinvestment prevails and subsidiarity (centralized governance) is superior when spillovers are weak (strong). Conversely, if linear cost sharing arrangements are feasible, decentralized authority often admits a socially optimal outcome while centralized authority (with majority or unanimity rule) does not. |
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Keywords: | D23 H70 H71 H72 H77 |
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