Working Paper: CEPR ID: DP13893
Authors: Jaume Ventura
Abstract: This paper develops a simple theoretical framework to study a set of regions, eachwith its own regional government, who share a union or central government. Thesegovernments must decide whether to implement or discard a large number of projectsthat produce local benefits for the region that implements them, and externalities forthe rest of the regions. Conflict or disagreement arises since different regions valueprojects differently. The classic assignment problem consists of deciding who decidesthese projects, either the union or the regional governments.It is well known that regional governments are insensitive to externalities. The keyobservation here is that the union government is insensitive to local beneÖts. Thus,each government maximizes only a piece of the value of projects, and disregards theother one. This observations leads to simple and clear rules for solving the assignmentproblem.
Keywords: European integration; centralization and decentralization; public goods; externalities; fiscal federalism
JEL Codes: D72; D79; F15; F55; H77
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Regional governments maximize local benefits (H10) | Inefficient outcomes when externalities are significant (D62) |
| Union government maximizes externalities (D62) | Neglects local benefits (H73) |
| Assignment of decision-making authority depends on relative size of externalities to local benefits (D62) | Union government should decide if externalities are large (D62) |
| Assignment of decision-making authority depends on relative size of externalities to local benefits (D62) | Regional governments should take precedence if local benefits are larger (H10) |
| Regional governments are efficient but have misaligned preferences (H10) | Union government is inefficient but has the correct preferences (H19) |
| Assignment problem should be approached by evaluating which government type minimizes decision-making errors (D72) | Depends on specific project characteristics (O22) |