Working Paper: CEPR ID: DP9514
Authors: Federico Boffa; Amedeo Piolatto; Giacomo A.M. Ponzetto
Abstract: This paper studies fiscal federalism when regions differ in voters? ability to monitor public officials. We develop a model of political agency in which rent-seeking politicians provide public goods to win support from heterogeneously informed voters. In equilibrium, voter information increases government accountability but displays decreasing returns. Therefore, political centralization reduces aggregate rent extraction when voter information varies across regions. It increases welfare as long as the central government is required to provide public goods uniformly across regions. The need for uniformity implies an endogenous trade off between reducing rents through centralization and matching idiosyncratic preferences through decentralization. We find that a federal structure with overlapping levels of government can be optimal only if regional differences in accountability are sufficiently large. The model predicts that less informed regions should reap greater benefits when the central government sets a uniform policy. Consistent with our theory, we present empirical evidence that less informed states enjoyed faster declines in pollution after the 1970 Clean Air Act centralized environmental policy at the federal level
Keywords: air pollution; elections; environmental policy; government accountability; imperfect information; interregional heterogeneity; political centralization
JEL Codes: D72; D82; H41; H73; H77; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Political centralization (H77) | Government accountability (H83) |
| Central government policies (H59) | Government accountability (H83) |
| Less informed regions (D89) | Greater improvements in government accountability (H19) |
| Centralization (H77) | Faster declines in pollution (F64) |
| Voter information (K16) | Relative benefits of centralization (H77) |