Relational Data Base Fundamentals

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					    Decentralization of
Introduction to Public Economics
 Increasing political pressure worldwide to rethink how to
  assign the responsibilities for expenditure and revenue
  raising across government levels ….or across regions as
  in Belgium, Australia, Canada, Germany, Spain, India,
  Brazil, Argentina, Mexico, …
 For example, who should be responsible for
      the national government
      the linguistic communities
      the provinces
      the local governments (communes in Belgium)

                                ???                         2
NOTE: This is a really broad concept:
 Different Forms of Decentralization
Centralized Unitary   Federal System      Decentralized
                                          Unitary System

  Central               Central
                              GVT         State/regional/provincial
   GVT    Unit
                      Subntnl   Subntnl          Central Unit
                        gvt         gvt


 How has the world chosen to organize
       its fiscal constitutions?
 Unitary (148 countries)
 Federal (45 countries)…usually large ones
 but not always…
   Australia, Belgium, Brazil,Canada,
    Germany, India, Mexico, Malaysia, Russia,
    Pakistan, Russia, South Africa, USA
 Confederal : European Union
Not all federal countries are
 decentralized and not all unitary
 countries are centralized!!!                   4
 Critical to understand because strong debates about how
  much subnational governments can actually deliver
    This … in spite of the sense that it increases accountability
     by bringing political decisions closer to the voters
 =>Increased Decentralization Worldwide
    Some leading (e.g. high income countries)
    Some lagging (e.g. low income countries)
    Some sensitivity with respect to definition of
     decentralization used
       Expenditure vs. revenue

    Relevance of mismatch between revenue and expenditure
     assignments across government levels
 Note also relevant in the EU context…
    …debate on …the Subsidiarity principle
    How do you aggregate the preferences of sovereign nations into
     a European set of preferences?                                   5
         Basic Questions to Answer
1. Which level of gvt should be responsible to
     deliver which expenditure?
2.   Which level has to pay for which specific state
3.   Which level should control which sources of
     fiscal (tax and non tax) revenue?
4.   Should there be any transfers or grants from the
     federal level to the states/provinces or from the
     states/provinces to the local
5.   How should transfers across government levels
     be designed?
6.   Should there be a control of sub-national
     government borrowing?
              It boils down to...
…looking for:
     a theory of how the efficiency of public
     goods provision may differ at different
     levels of government
        (which level should deliver what at the
         highest efficiency level)…
    but recognizing that we have concerns
     to deal with:
     1. equity,

     2. fiscal constraints

     3. accountability                             7
But … what exactly do we mean by
 Fairly mechanical view
    =“old fashion” public finance definitions
 2 measures
     Decentralization in terms of revenue
        Definition: share of subnational tax and non-tax
         revenues excluding grants in total national revenue
            What does it measure? Use of autonomy over
     Decentralization in terms of expenditure
        Definition: share of subnational spending over total
         national spending
            What does it tell us? Compliance with
             responsibilities over service obligations?     8
   Table 1

                 Decentralization in the OECD
                                Spending %         Revenue %
 Greece                                      5.0               3.7
 Portugal                                 12.8                 8.3
 France                                   18.6               13.1
 Norway                                   38.8               20.3
 United States                            40.0               40.4
 Denmark                                  57.8               34.6
 OECD Average                             32.2               21.9

                                       The average state/local
   On the spending side, the         government collects 22% of
differences are also huge…and     total government revenue, while
 the match between spending         those in the U.S. collect 40%.
and revenue…modest at best!.
    Example: Evolution of expenditure
    decentralization across key sectors
                   Developed      Developing
                   countries       countries

                 1990     2004   1990     2004
Education        70.8    93.0    65.2    69.2

Health           57.1    89.6    61.1    48.8

Infrastructure   71.1    76.5    50.4    57.0

      Centralized vs decentralized Spending
       Case for CENTRAL                  Case for DECENTRALIZED
1. Central planning                 1.   Local participatory planning
2. Redistribution across            2.   Diversity consistent with local
     regions for regional equity
3.   Economies of scale
                                    3.   Incentives for competitive and
4.   Regional risk sharing
                                         innovative service delivery
5.   Internal common market
                                    4.   Better quality, quantity and
6.   Harmonization of
     expenditures across regions         access of public services
7.   Avoidance of race towards      5.   Lower agency costs
     bottom to attract investment   6.   Bottom-up Fiscal and political
     or people                           accountability (“the voice of the
8.   Rules driven top-down               people”)
     accountability                 7.   Restraints against corruption
9.   Ensure subnational budget           and rent seeking
     constraints are not soft and
     hurt the country               8.   Easier to constraints on
                                         government size because better
                                         accountability???                 11
 Centralization vs Decentralization of Taxation
  Case for Centralized         Case for Decentralized
1. Efficiency in collection   1. Fiscal accountability
2. Lower compliance costs     2. Better administration of
3. Encourages factor             taxes on immobile factors
   mobility for internal      3. Better use of fees and
   common market                 charges
4. Wasteful tax competition   4. Reduced corruption (?)
5. Discourages shifting tax
   burden to non-residents
6. Fiscal inequity avoided

       Theoretical Foundations of
   Decentralized Fiscal Constitutions (1)
 Always useful to conceptualize stylized facts…
 Traditionally, public economics has looked at
  decentralization as a simple optimization problem which
  deals with public goods, economies of scale and
  externalities with various government levels
       The decentralization theorem (all the work by

        Oates (1972) and his many co-authors):
        decentralization can improve (allocative)
        efficiency of public service delivery by matching
        expenditures with constituents’ preferences,
        provided there are no economies of scale and no
        externalities/spillovers                        13
       Theoretical Foundations of
   Decentralized Fiscal Constitutions (2)
 More recently some economists looked at
  decentralization as an incentive issue and deals with it
  with agency models
        Multiple principals, multiple agents (see Laffont and his
         followers on this)
 Also some economists looked at decentralization as in
  the optimal level of vertical disintegration of firms
        Application of the new theory of the firm (Cremer,
         Estache and Seabright)
 Also lots of good research in public administration,
  politics, …that needs to be recognized if you do
  research here
      Expenditure Assignment Principles
 Essential to keep in mind when thinking about how to
  design decentralization that the policy goals include:
    Economic Efficiency
         driven by
              Spatial externalities and spillovers
              Economies of scale and scope
              Administrative and compliance costs
              Proximity to users…and voters
   Fiscal efficiency
   Regional equity
   Redistribution
   Correction of market failures provision of quasi-
    private goods
   Preservation of internal common market
   Economic stabilization
   Recognition of relevance of spending power/capacity    15
      Tax Assignment Principles
Similarly, essential for policymakers to have sound
  economic criteria for distributing revenue
 Expenditure responsibilities of sub-levels=>
  fiscal needs
 Availability of local taxes for local services
 Avoidance of tax-induced movements
 Stability for sub-level governments
 Fair distribution of national wealth
 Efficiency of internal common market
 Efficiency in tax administration
    So…what is the optimal fiscal
 Given all the concerns we just saw…how can we
  come up with a formal model to answer the basic
    “What is the optimal division of responsibilities across
     different levels of government?”
 As hinted earlier, the answer is offered by a theory of
  optimal fiscal federalism which is essentially a theory of
  how the efficiency of public goods provision may have
  to differ at different levels of government

   Optimal fiscal federalism? (2)
 We already know that two of the major
 problems in public goods provision are:
   Preference   revelation: Difficult to design
    democratic institutions to cause individuals to
    reveal their preferences honestly.
   Preference   aggregation: Difficult to
    aggregate individual preferences into a social

                The Tiebout Model
  Decentralization can be viewed as a solution to these problems
 Tiebout (1956) showed that the key to understand inefficiency in
   a centralized public goods provision came from the recognition
   of two missing factors which are relevant when looking at the
   opportunities offered by decentralized provision.
  1. Shopping induces efficiency in private markets.
  2. Competition induces the right prices and quantities in
      private markets.
 So the main message of Tiebout is:
       competition across local jurisdictions places competitive
        pressures on the provision of local public goods…
       …and in spite of some heroic assumptions needed to
        develop the model…it turns out to be quite consistent with
        empirical evidence                                       19
           The Tiebout Model (2)
 With public goods provided at the local level,
  competition naturally arises because individuals can
  vote with their feet by moving to another city or
  commune or province…without much disruption.
 This induces fiscal discipline for local governments,
  thus, decentralization can be seen as a new preference
  revelation device and preferences are revealed by
 Tiebout argued that the threat of exit and hence loss of
  tax revenue or other local income can induce efficiency
  in local public goods production.
 Under certain (unrealistic) conditions
  public goods provision will be fully efficient
  at the local level.                                        20
       The Tiebout Model (3)
 Tiebout’s formal model assumes the
  1.   Large number of individuals, who divide
       themselves up across towns that provide
       different levels of public goods.
  2.   Town i has Ni residents who all demand
       Gi of the public good.
  3.   Uniform tax of Gi/Ni.

      The Tiebout Model (4)
 In this model, individuals will divide
  themselves up so that each resident in
  any town has the same taste for public
 Since they have the same taste, they
  will demand the same level of public
  good spending Gi

     The Tiebout Model (5)
 Tiebout’s model solves our two problems:
   Preference revelation: There is no incentive to
    lie. With a uniform tax on all residents, the
    consumer saves 1/Ni in tax but receives 1/Ni
    less of the public good.
   Preference aggregation: it is solved because
    everyone in the town wants the same level of
    public goods, Gi.

      The Tiebout Model (6)
 => Lindhal pricing can work in this model!
   each individual report own true valuation of the PG
   the valuations are added up
   and each individual is billed for the total cost of PG
    divided by the population size of the local community
   => this is an equilibrium since each person is happy to
    pay his/her share of the tax to get the PG and the
    condition for optimal good provision is met because
    the level of PG is determined by the sum of individual

 Problems with the Tiebout Model (1)

 Main problems with the model,
 however are related to:
 1. Tiebout competition
 2. Tiebout financing
 3. Spillovers

 Problems with the Tiebout Model (2)
 Tiebout competition may not hold because:
   It requires perfect mobility.
   It requires perfect information on the
    benefits individuals receive and the taxes
    they pay.
   It requires enough choice of towns so
    that individuals can find the right levels
    of public goods.
  Problems with the Tiebout Model (3)
 Tiebout financing is problematic because:
   It requires lump-sum taxes that are independent of a
    person’s income => viewed as highly inequitable.
        YET, it is more common for towns to finance public
         goods through proportional taxes on homes or home
         related services
        Note that proportional taxation leads to the problem of
         the poor chasing the rich when the rich too large a share
         of the services mostly used by the poor
        The use of zoning—limits on use of land-- can address this
         problem by pricing the poor out of the market
           For example, a town that prohibits multifamily dwelling such
            as apartments lowers the available amount of housing, and
            thus inflates the value of existing housing, keeping the poor
 Problems with the Tiebout Model (4)
 Tiebout model is also problematic because
 of the assumption of no externalities or
   Model   assumes public goods only have effects
    in a given town, and that they do not spill over
    to neighboring towns.
   Some public goods, like a public park,
    probably violate this assumption.

     Evidence on the Tiebout Model
 In spite of these problems, Tiebout
 model’s basic intuition that individuals
 vote with their feet is still a strong one.

 Two types of tests reveal this:
     Resident similarity across areas
     Capitalization of fiscal differences into

      house prices
     Evidence on the Tiebout Model (2)
         Residents similarity across areas
 A clear prediction of the Tiebout model is that
  residents in a local community will have similar
  preferences for local public goods.
        The more local communities and choices there are,
         the more residents can sort themselves into similar
   Gramlich   and Rubenfeld (1982) found greater
    sorting in larger metropolitan areas (where
    mobility costs would be smaller), and greater
    satisfaction with public goods provision.
        Evidence on the Tiebout Model (3)
   look at the prices of houses across areas
 Very little actual mobility is required for the
  Tiebout mechanism to operate because people
  not only vote with their feet.
    They also vote with their pocketbook!!
 Tiebout model predicts that any differences in
  fiscal attractiveness will be capitalized into house
     For instance, access to top local schools drives the prices of
      houses!..coming soon in Belgium with the Arena rule on
      school access

     Evidence on the Tiebout Model (4)
look at the prices of houses across areas (2)
 Overall, the price of any house reflects the costs
  (including local property taxes) AND benefits
  (including local public goods) of living there.
   Holding taxes constant, higher or better levels of
    public goods raise housing prices.
   Hold public good levels constant, raising taxes
    lowers housing prices.
 =>Housing prices are a reflection of people
  voting with their pocketbook.

     So what can we do with the Tiebout model?
  ...towards a theory of optimal fiscal federalism?
 More precisely, what are the normative
  implications of the Tiebout model?
      That is, what should be the principles that guide
       the provision of public goods at different levels of
 The extent to which public goods should be
  provided at the local level is determined by:
  1.   Tax-benefit linkages
  2.   Positive externalities or spillovers
  3.   Economies of scale
        Optimal Fiscal Federalism (1)
 Tax-Benefit Linkages: The model implies that the
  extent to which public goods should be provided at the
  local level is determined by tax-benefit linkages.
      IF Strong linkages (such as local roads)=> most residents
       benefit, => the good should be provided locally.
      IF Weak linkages (such as welfare payments) => most
       residents do NOT benefit, => the good should be
       provided at a higher level.

 If residents can see directly the benefits they are buying
  with their property tax dollars, they will be willing to pay
  local taxes. Otherwise, they may “vote with their feet.”         34
     Optimal Fiscal Federalism (2)
 Externalities: The 2nd factor to determine the
  optimal level of decentralization is the extent of
  positive externalities.
    If the local public good has spillovers to other
     communities, the LPG will be underprovided.
        With spillovers, higher levels of government have
         a role in promoting the provision of these public

  Illustrating Positive Spillovers
 Examples:                   euros
    Environmental policies.
                                       Private and
    Tax/VAT competition.              Social Marginal
 If decentralised, each               Cost
  region chooses a level of
  public good that is too    MCc
    e.g. Qd2 for Region 2.                               region 1 & 2
 Two-region gain from                                    Marginal
                                                          Benefit Curve
  centralisation is area A.
 Similar conclusion with                            Region 2’s Marginal
  negative spillovers: Q too                         Benefit Curve
  high under                                         (demand curve)
  decentralization.                   Qd2   Qc,1&2       Quantity
     Optimal Fiscal Federalism (3)
 Economies of scale: The 3rd factor driving the
 optimal level of decentralization is the economies
 of scale in production.
   Public  goods with large economies of scale, like
    national defense, are best provided by the central
    government (not efficiently provided by many
    competing local jurisdictions).
   Public goods without large economies of scale,
    like police protection, may be provided more
    efficiently in Tiebout competition.
   Illustrating Economies of Scale
 Costs of providing public good
  may fall with scale
      E.g. single national rail or
       bus network may be more
       efficient than many regional
       ones.                                               MC p.p.
      At EU level: foreign and                            (decentralised)
       security policies…even if
       strong differences in
       preferences                            C
 Different marginal costs apply in                              MC p.p.
  centralized and decentralized                                  (centralised)
  case.                                             D
 Different demand curve as well
  (“standardization of demand)                                   Davg
 Region 1: welfare gain C vs loss D                             D1
   centralization may be                         Qd1   Qc,1&2    Quantity
      Optimal Fiscal Federalism (4)
 The Tiebout model therefore predicts that
  local spending should focus on
  1. broad-based programs
  2. with few externalities and
  3. relatively low economies of scale.
     Examples include road repair, education,
      garbage collection, and street cleaning.

      Redistribution across communities
 The Tiebout model allows us to consider one of
 the most important problems in fiscal
   Should    there be redistribution of public funds
      across communities?
 There is currently enormous inequality in the
 ability and perhaps desire for communities to
 finance public goods.
     For instance, gaps in per-pupil spending between Flanders and
      Wallonia arise because of differences in the local tax rate and
      revenue, but more importantly, from differences in tax bases
      across regions.
                Evidence of within country
        inter-regional inequality around the World
                  China (1999)

                   India (1997)

                   Brazil (1997)

              France (1995-97)                                               Theil index (T)

                 Italy (1995-97)
                                                                             Weighted gini index
                                                                             (Gw )
                Spain (1995-97)
                                                                             Relative mean Deviation
Former West Germany (1995-97)                                                (Rw )
                                                                             Weighed coefficient
      United Kingdom (1995-97)                                               of variation (CVw )

                 Canada (1998)

           United States (1997)

          Australia (2002-2003)

                                   0   0.2     0.4         0.6     0.8   1
                                             Inequality Measures
   So how does this redistribution issue
             come about?
 Often decentralization of expenditure and revenue
  responsibilities do not match => built-in deficits, at
  least for some decentralized governments
 So how can subnational governments close the gaps
  between their own revenue sources and their assigned
  expenditure responsibilities?
 Many countries practice fiscal equalization, whereby
  the national government distributes grants to sub-
  national government in an effort to equalize differences
  in wealth across regions.
 => need to look at this in some details
              Should We Care?
 The question then becomes:
     Should higher levels of government mandate
     redistribution across lower levels to offset these
     differences in spending?
 In a perfect Tiebout world, communities would have
  formed for the efficient level of public goods,
  redistribution would not be good since it would impede
  that efficiency.
 For Tiebout, redistribution should be across
  individuals WITHIN communities, NOT across
 Yet there is a political demand for interregional
              Should We Care? (2)
 To the extent that Tiebout does not perfectly
  describe reality, however, there are two
  arguments for redistribution.
   The first is the need to fix the failures of the
    Tiebout mechanism.
         For example, even if one desires to be in a high benefit
         community, a household may be priced out of it by zoning
         restrictions, etc.
   The    second is the need to address externalities.
        It is possible that local public goods, like education, have
         spillovers to other communities=> case for higher level
         subsidies to local primary education
What are the tools of Redistribution in
   a decentralized gvt structure?
 When higher levels of government
 redistribute, they do so through grants
         are cash transfers from one level of
   Grants
   government to another.
 They do so to fix two types of imbalances:
   Horizontal imbalances
   Vertical imbalances

Reasons for intergovernmental transfers?
Horizontal imbalances?
 Different capacities of the sub-levels to raise
 Different costs of services to be provided
  (expenditure responsibilities).

                             $$       $$$$
   Income                                        $

                 State A   State B   State C   State D

   Expenditure   $$$$$$     $$$$      $$$       $$$
Reasons for Intergovernmental transfers (2)
Vertical imbalances?
 Revenue responsibilities lie with national
 level while expenditure responsibilities are
 with sub- level
                               National government

                     $         $            $$
         State A   State B   State C

          $$$       $$$            $$                47

         $$$$                   $$$
   Types of Grants used for Redistribution
 Unconditional vs conditional transfers
   Unconditional: preserving local autonomy and
    enhancing inter-jurisdictional equity
       Block grants –a fixed amount of money with no
        mandate on how it is to be spent.
   Conditional:providing incentives to
    undertake specific activities
       Conditional block grants–a fixed amount of money
        with a mandate that it be spent in a particular
  Types of Grants used for Redistribution
Conditional Transfers
  matching vs non-matching:
     Matching grants –which ties the amount of funds

      transferred to the community to the amount of
      spending it currently allocates to public good
         open-ended vs. closed-ended matching
  Input based conditionality vs output based
     Input based conditionality often intrusive and

      unproductive. Output based conditionality can
      advance grantor’s objectives while preserving
      local autonomy
(in thousands)


                        $500 $750
                 $0   $375                 $1,375         $2,000   Education
                                                                   (in thousands)
      Figure 2 a The effects of different government grants
Private                   Such a instead that an income
                         Imagine grant acts asthe city was
spending                    given keeps the amount –
                        effect, butan identicalprice ratio at 1
(in thousands)              $375,000 – inthan ½. grant.
                                      rather a block
       $1,375         Suchone-for-one “matching grant”the
                         Initially, the city faces conditional
                         A a alternative is a a tradeoff
                        A finalgrant might mandate that
                       changes the price of and private city
                         between a fixed As long up money
                           city can spend receive as to
                                               amount of the
                      block grant, educationeducation and is already
                            goods. The spent ratiomore also
                                          But the block grant
                       $375,000 if pricespendingeducation. allows other
                                 only is price on education.
                                             ratio to
                      that can the it be spent on ½.is 1. than $375,000 on
                                        With this lower price for higher at ICthe
                                         Total spending utility is education and
                                           choices, and on both education, 3,
                                        The city pays only half of the $750,000
                                          education, it is equivalent to a block
       $1,000                            private andentails less education. the
                                          cost, goods has increased with
                                                        substitution effects lead
                                        income however. The state pays the to
                                              which has no could still choose
                                          grant andThe city effect on
         $800                                       in matching grant.
                                                       the city $375,000.
                                         an increase in educational spending.
                                      The votersremainder, have preferences
                                                   consume $750,000 of education.
                                       over public and private goods. They
         $625                              choose $500,000 of education.

                 $0         $575 $750
                         $375      $1,000         $1,375         $2,000     Education
                                                                            (in thousands)
      Figure 2 b The effects of different government grants
  Goals matter to the optimal Grants/transfers design choice
Objective/Goal Grant Design                Better Practices       Practices to Avoid
Closing            Reassign, tax base      Canada                 Deficit grants, tax by
subnational        sharing                                        tax sharing
Fiscal Gap
Closing            Fiscal capacity         FCE with an explicit   General revenue
Regional fiscal    equalization (FCE)      standard as in         sharing with multiple
disparities                                Canada, Germany,       factors,
                                           Denmark                Fiscal eq. with a fixed
                                                                  pool as in Australia,
Setting national   Block transfers,        Ex-Indo. roads and     Conditions on
minimum            conditions on service   education, Chile,      spending
standard           standards               Brazil

Benefit            Matching grant          S. Africa teaching
spillovers                                 hospitals
Influencing        Open-ended              Canada social          Ad hoc grants
local priorities   matching                assistance
Stabilization      Capital grant with      Political and policy   Stabilization without
                   upkeep requirements     risk guarantee         upkeep
  So what is the evidence on the effects of
 Lots of evidence on country specific
 Not that much on cross-country
     In on on-going research project (Goicoechea et al.)
      generate some insights on the effects of
      decentralization on the total level of expenditure
      on various key expenditure categories.

   Summing up the international comparison
 Decentralization:
    Reduced total expenditures in:
        Clearly in transport and all infrastructure in very poor countries

    Increased total expenditures in:
        Power and housing in HICs

    Changed the composition of expenditures in:
        At the total level:

               Clearly in all LICs and MICs (reading down the columns in
                 Summary (1) since not the same sign for all sectors)
               Not much in HICs
            At the sub-national level
               Not much for LICs
               Somewhat more for MICs and HICs
               But generally, except for transport in LICs, always preference for
                 more expenditure than with less decentralization
       Had statistically unclear effects in the other cases
  How does this all matter in the
  context of the design of the EU?
 According to fiscal federalism theory,
 which decisions should be made at the EU
   Thinks   of the E
 In practice?
   How does the EU make its decisions?
   How likely is a decision-making gridlock?
The core: Qualified Majority Voting
 Most EU decisions made by co-decision
     Proposal adopted in the Council of Ministers by
      QMV and in the EP by majority voting
 Voting in the Council reflects States’
  national interests
 QMV requires more than a simple majority
  to approve a decision
 This makes it easier for small Member
  States to block decisions
Pre-2004 QMV (i.e. Pre-Nice)
 Number of votes not perfectly proportional to
 Total number of votes in the EU15: 87
 Threshold for winning majority: 62 votes
   ‘qualified majority’: about 71% of votes
   required to adopt proposal.
 Relatively large coalition required to win a
 Relatively small coalition of countries can
  block a vote.
Voting Post-Nice Treaty Reforms
  Two main changes:
 1. QMV rules more complex: two new criteria in
   addition to votes
      votes: 255 votes out of 345 Council votes in
       EU27 (74% of votes required to adopt
      number of members: half of the member
       states, i.e. 14 out of 27
      population: 62% of EU population.
 2. Votes reallocated in favour of big nations
Constitutional Treaty (CT)
 Nice Treaty QMV rules: relatively small
  coalition can block important decisions.
     Risk that Council’s becomes deadlocked
 CT QMV rules: a proposal wins if backed by
  member states with
     At least 65% of EU population
     At least 55% of member states.
     At least 15 member states (irrelevant if the EU
      has 27 or more members: 15/27=56%)
 Reallocation of vote shares: large nations
  gain (except Spain and Poland)
  Blocking-coalition analysis
 Ability of ‘likely’ coalitions to block EU
 Example: “Newcomers” and “Poor” in EU27
   Newcomers:   12 new member states
   Poor: Newcomers+4 ‘cohesion’ members
    (ES, PT, GR & IE)
 ‘Poor’ exceed the Nice Treaty blocking
  thresholds of votes and member states
 ‘Newcomers’ exceed the votes threshold
                           A last word…
 This (last) lecture presented a theory (and its tests) of why
  some spending and some revenue collection should be
  done locally or regionally
 The theory has provided lots of insights…
    some case for redistribution across regions
    optimal redistribution tool depends on goals
 But it does not really address all incentives issues
  associated with the decentralization choice
      Agency problems with unclear assignments and undefined property
       rights (in terms of taxing, spending and regulation)
           Information asymmetry matters a lot as well when looking within
            government structures!
      Intergovernmental bargaining can have high transaction
       costs…Look at Belgium!
      Scope for lobbying for inefficient outcomes can be huge
           (Tragedy of commons with pork-barrel politics)

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