Rent-seeking Behaviour, Externalities and Decentralization

The paper analyzes local public goods provision with positive inter-jurisdictional spillovers and preferences heterogeneity, comparing decentralized and centralized systems under a political economy approach. As in the recent theory of fiscal federalism, we consider the rent-seeking behaviour of policy-makers. Given this framework, the convenience of decentralization depends on the interactions among these factors: the gain of internalizing externalities and the distribution of preferences of citizens and decision-makers within the national territory. The assumption of rent-seeking governments with their preferences and own objective functions to maximize can produce, in certain instances, a rather different view of the properties of decentralization.