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The decentralization tradeoff for complementary spillovers

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  • Martin Gregor
  • Lenka Stastna
Abstract
We examine a symmetric two-district setting with spillovers of local public spending where a spill-in from the foreign spending is not a substitute, but a complement to domestic spending. Specifically, we assume production of two district-specific public goods out of two complementary district-specific inputs. We compare equilibria in non-cooperative decentralization and cooperative centralization for different spillovers, complementarities and cost-division rules, and control for the effects of strategic delegation and the feasibility of voluntary contributions to the input in the foreign district. We find that centralization welfare-dominates decentralization in most institutional settings and for a wide range of parameters, yet we can also identify necessary and sufficient conditions for decentralization to welfare-dominate centralization. The setup features three novelties: In the absence of transfers, welfare in decentralization increases in spillovers, strategic delegation in decentralization improves welfare, and centralized provision may be non-monotonic in spillovers.
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Suggested Citation

  • Martin Gregor & Lenka Stastna, 2012. "The decentralization tradeoff for complementary spillovers," Review of Economic Design, Springer;Society for Economic Design, vol. 16(1), pages 41-69, March.
    • Handle: RePEc:spr:reecde:v:16:y:2012:i:1:p:41-69
    DOI: 10.1007/s10058-012-0113-y
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    Cited by:

    1. Martin Gregor, 2012. "Modeling positive inter-jurisdictional public spending spillovers," Working Papers IES 2012/16, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jun 2012.
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    3. Gregor, Martin, 2015. "Task divisions in teams with complementary tasks," Journal of Economic Behavior & Organization, Elsevier, vol. 117(C), pages 102-120.

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    More about this item

    Keywords

    Spillover; Spill-in; Complementarity; Decentralization theorem; Externality; H41; H73; H77;
    All these keywords.

    JEL classification:

    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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