Working Paper: CEPR ID: DP9199
Authors: Rafael Costa Lima; Humberto Moreira; Thierry Verdier
Abstract: We re-address the tradeoff between centralized and decentralized decision making of local policies when policymakers are subject to capture by special interest groups. In particular, we consider the case where lobbies have private information about their ability to exert influence. We find a new informational effect in the political game under centralized structures that gives the policymaker additional bargaining power against lobbies. Thus, when compared to decentralization, centralization reduces capture, and is more likely to be welfare enhancing in the presence of information asymmetries. Then, we apply the model to the classical problem of local public goods provision and to the incentives towards the creation of customs unions agreements.
Keywords: Asymmetric Information; Centralization; Custom Unions; Lobbying; Public Goods
JEL Codes: D72; D82; F15; H41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Centralized decision-making (D70) | Reduced political capture (D72) |
| Centralized decision-making (D70) | Increased bargaining power of policymaker (D72) |
| Preference dilution effect (J79) | Reduced political capture (D72) |
| Information transmission effect (D83) | Reduced political capture (D72) |
| Centralized decision-making (D70) | Policies closer to societal optimum (D78) |
| Centralized decision-making (D70) | Enhanced policymaker's bargaining power (D78) |
| Asymmetry of information in lobbying (D82) | Centralized systems preferable (H77) |