Should Different People Have Different Governments?

Federico Boffa, Amedeo Piolatto and Giacomo Ponzetto

No BEMPS30, BEMPS - Bozen Economics & Management Paper Series from Faculty of Economics and Management at the Free University of Bozen

Abstract: The classic theory of scal federalism suggests that different people should have different governments. Yet, separate local governments with homogeneous constituents often end up doing poorly. This paper explains why and answers three questions: when regions are heterogeneous, what determines if power should be centralized or decentralized? How many levels of government should there be? How should state borders be drawn? We develop a model of political agency in which voters differ in their ability to monitor rent-seeking politicians. We find that rent extraction is a decreasing but convex function of the share of informed voters, because voter information improves monitoring but also reduces the appeal of holding office. As a consequence, information heterogeneity makes centralization appealing as a way of reducing rent extraction. Conversely, taste heterogeneity prompts decentralization as a way of matching local preferences. We also explain why the proliferation of government tiers harms efficiency. We find economies of scope in accountability: a single government in charge of many policies has better incentives than many special-purpose governments splitting its budget. Thus, a federal system is desirable only if information varies enough across regions. Our model implies that optimal borders should cluster by tastes but also ensure diversity of information. Quantitatively, our fi ndings suggest excessive government fragmentation in the United States.

Keywords: federalism; government accountability; imperfect information; interregional heterogeneity; elections (search for similar items in EconPapers)
JEL-codes: D72 D82 H73 H77 (search for similar items in EconPapers)
Pages: [73 pages]
Date: 2015-06
New Economics Papers: this item is included in nep-cdm, nep-mic, nep-pol and nep-ure
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Related works:
Working Paper: Should Different People Have Different Governments? (2015)
Working Paper: Should Different People Have Different Governments? (2015)
Working Paper: Political centralization and government accountability (2015)
Working Paper: Centralization and accountability: Theory and evidence from the Clear Air Act (2013)
Working Paper: Centralization and Accountability: Theory and Evidence from the Clean Air Act (2012)
Working Paper: Centralization and accountability: theory and evidence from the Clean Air Act (2012)
Working Paper: Centralization and Accountability: Theory and Evidence from the Clean Air Act (2012)
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