Does decentralization increase government responsiveness to local needs?: Evidence from Bolivia
ABSTRACT This paper examines whether decentralization increases the responsiveness of public investment to local needs using a unique database from Bolivia. Empirical tests show that investment patterns in human capital and social services changed significantly after decentralization. These changes are strongly and positively related to objective indicators of need. Nationally, these changes were driven by the smallest, poorest municipalities investing devolved funds in their highest-priority projects. The findings contradict common claims that local government is too corrupt, institutionally weak, or prone to interest-group capture to improve upon central government’s allocation of public resources.
- International Review of Administrative Sciences - INT REV ADM SCI. 01/1980; 47(2):133-145.
- [show abstract] [hide abstract]
ABSTRACT: This paper develops an approach to the study of democratic policy-making where politicians are selected by the people from those citizens who present themselves as candidates for public office. The approach has a number of attractive features. First, it is a conceptualization of a pure form of representative democracy in which government is by, as well as of, the people. Second, the model is analytically tractable, being able to handle multidimensional issue and policy spaces very naturally. Third, it provides a vehicle for answering normative questions about the performance of representative democracy. Copyright 1997, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.The Quarterly Journal of Economics. 01/1997; 112(1):85-114.
Article: Do welfare magnets attract?[show abstract] [hide abstract]
ABSTRACT: Some scholars and many policymakers claim that poor people, in order to improve their lot, move to states that offer high welfare benefits. The authors test the validity of this claim using data from six Current Population Surveys: 1982-1984 and 1986-1988. They find no evidence to support the so-called welfare magnet hypothesis. Poor people do not move from one state to another to receive more public assistance. In fact, the poor hardly move from their home state at all. True, low-income persons who move to states with generous welfare benefits are more likely to go on welfare than are poor people who move to low benefit states, but their numbers are too small to affect a state's welfare expenditures. The authors also find that low-income people who already live in high benefit states are no more likely than the poor who live in low benefit states to participate in welfare programs.
Does Decentralization Increase Responsiveness
to Local Needs? Evidence from Bolivia
* The author may be reached at J.P.Faguet@lse.ac.uk, Centre for Economic Performance and Development
Studies Institute, London School of Economics, Houghton Street, London WC2A 2AE. This paper is taken
from chapter 2 of my Ph.D. dissertation. This research was financed by a grant from the World Bank
Research Committee. An ORS award and additional financial support were kindly provided by the ESRC.
I am very grateful to my advisers Tim Besley and Teddy Brett for invaluable criticism, advice and
encouragement through the numerous iterations of this work, and to Gunnar Eskeland for his many insights
and constant support. I also thank Roli Asthana, Monica Baumgarten, Shantayanan Devarajan, Markus
Haacker, James Putzel and seminar participants at the IDB, LSE, World Bank and at the LACEA99
conference for their thoughtful comments and suggestions. The findings, interpretations, and conclusions
expressed in this paper are entirely those of the author. They do not necessarily represent the views of the
World Bank, its Executive Directors, or the countries they represent.
Bolivia’s recent decentralization involved the creation of hundreds of new municipalities,
devolution of substantial resources from central agencies to local governments, and the
development of innovative institutions of local governance. Detailed study of investment
sector-by-sector shows that objective indicators of need are the most important determinants
of the changes in investment patterns that ensued throughout the country.
The wisdom of decentralizing government has become popular currency in our time. At the
end of a century that witnessed the sustained growth of the central state in both the
developed and developing worlds, reformers and idealists have turned to decentralization as
an antidote to ills as varied as governmental corruption, autocracy and repression, and
public-sector inefficiency. But the public discussion of decentralization is often confusing,
assuming the character of sweeping, cross-disciplinary claims about the effects of
administrative measures on the quality and efficiency of both government and social
interaction. Competing proposals, expressed in a lexicon that spans economics, political
science, sociology and public administration are often hard to compare either as policy
instruments or in terms of the effects they are designed to produce. Unfortunately, much of
the empirical literature on decentralization is similarly messy and inconclusive,
simultaneously examining issues as diverse and ill-defined as access to resources,
participation, administrative capacity, employment, growth, and local and national
development strategies. Having cast such a wide net, such studies subsequently fail to
ground their research theoretically, and their empirical approach often descends into
description and anecdote from selected cases of decentralization in very different countries.
The radical and well-documented experience of Bolivia offers us the opportunity of
conducting a methodologically rigorous study of decentralization, where we focus on a few
questions which are among the most contentious in the field but have not been answered
adequately in the literature. Restricting our scope to decentralization in one country allows
us to control for external shocks, political regime, institutional and cultural effects, and other
exogenous factors in a more systematic way than cross-country studies can. Furthermore,
the Bolivian reform coincided with a huge upsurge in the generation of local-level and
national data. These data are of surprising scope and quality (especially compared to
Bolivia’s national-income cohort) and include not only the usual information on fiscal flows
and investment sums, but also numerous variables covering political, institutional,
administrative and even procedural (good-government type) indicators for all of Bolivia’s
311 municipalities. Our use of such variables constitutes an innovation of this paper.
The central question that we seek to answer is does decentralization increase the
sensitivity of public investment decisions to local needs. Secondary questions include: (i)
Under what conditions do the various effects we posit (local knowledge, central
government’s technical and organizational advantages, political weight) dominate? and (ii)
What are the welfare implications of different levels of public goods provision under a
variety of assumptions? In addition, this paper seeks to make a case by example of how to
approach such questions empirically. We argue that locally specific economic and political
decisions by local government and local civil society are important, and even defining,
characteristics of decentralization which must be studied if the phenomenon is to be
Before continuing, it is important to discuss precisely what we mean by
“decentralization,” a word used in the policy literature to refer to everything from the
administrative deconcentration of executive agencies in autocratic regimes to privatization
in democracies. For the sake of focus, this paper will concentrate on decentralization under
democratic regimes. We shall see that the presence and nature of democratic controls play a
large role in our ability to theorize about decentralization. We define decentralization as
Decentralization is the devolution by central (i.e., national) government of
specific functions, with all of the administrative, political and economic
attributes that these entail, to local (i.e., municipal) governments which are
independent of the center within a legally delimited geographic and
The two reasons for choosing this usage are both powerful and fortuitous. First, the
clarity of the proposition greatly simplifies analysis, allowing it to focus on discrete, well-
defined decentralizing measures and exogenous variables in order to gauge the empirical
effects of each on policy outputs. Second, the case of Bolivia involves precisely this form of
decentralization (see section 2.1 below), implemented uniquely and vigorously.
The remainder of the paper is organized as follows. Section 2 discusses Bolivia’s
decentralization program, and then examine in detail the changes in national resource flows
which it brought about. Section 3 reviews the literature and then develops a model to
analyze the tradeoff between local government’s knowledge of local needs v. central
government’s technical and organizational advantage in the provision of public services in
districts with heterogeneous preferences. We use a simple model of decentralization defined
by two equations to examine the welfare implications of central v. local goods provision
under different assumptions. Section 4 discusses our empirical methodology and then
presents three sets of econometric results: two tests of whether decentralization changed
public investment patterns across Bolivia’s 311 municipalities, and a set of sectoral models
of this change centered on objective variables of need. Conclusions and suggestions for
further research along this path are in section 5.
2. Decentralization in Bolivia
2.1 Popular Participation and the Decentralization Reform
On the eve of the 1952 revolution, Bolivia was a poor, backward country with
extreme levels of inequality, presided over by a “typical racist state in which the non-
Spanish speaking indigenous peasantry was controlled by a small, Spanish speaking white
elite, [their power] based ultimately on violence more than consensus or any social pact.”1
The nationalist revolution which followed expropriated the “commanding heights” of the
economy, and laid the foundations for the development of one of the most centralized state
apparati in the region. The ruling Nationalist Revolutionary Movement embarked upon a
state-led modernization strategy in which governing elites in La Paz directed a concerted
drive to erase the social relations of the past and create a new, more egalitarian society.2
Political power was concentrated in the hands of the president, who directly appointed
departmental governors and heads of the regional development corporations, among many
others, and the legal and political instruments of local governance were by and large given
little chance to develop. As a result, beyond the nine regional capitals (including La Paz)
and an additional 25-30 cities, local government existed in Bolivia at best in name, as an
honorary and ceremonial institution devoid of administrative capability and starved for
funds. And in most of the country it did not exist at all (see point 4 below). This, very
generally, is the background against which the Bolivian decentralization reform was
announced in 1994. The genesis of the reform, along with the origins of the decentralization
idea in Bolivia and the interest groups ranged for and against it, are treated in much detail in
Faguet (2000b). The scale of the change in resource flows and political power that this law
brought about make it a fascinating social experiment in decentralization, worthy of study.
The core of the decentralization reform consists of four points:3
1. The share of all national tax revenues devolved from central government to the
municipalities was raised from 10 percent to 20 percent. More importantly, whereas
before these funds were apportioned according to ad hoc, highly political criteria,
after decentralization they are allocated strictly on a per capita basis (see below).
2. Title to all local infrastructure related to health, education, culture, sports, local roads
and irrigation was transferred to municipalities free of charge, along with the
responsibility to administer, maintain and stock this with the necessary supplies,
materials and equipment, as well as invest in new infrastructure.
3. Oversight Committees (Comités de Vigilancia) were established to oversee
municipal spending of Popular Participation funds, and propose new projects. These
are composed of representatives from local, grass-root groups within each
municipality, and are legally distinct from municipal governments. Their power lies
in the ability to suspend all disbursements from the central government to their
respective municipal governments if they judge that such funds are being misused or
stolen, as well as the natural moral authority which they command. When
suspension occurs, the center undertakes no arbitration, but simply waits for the two
1 Klein, H., p.237. Author’s translation. Klein is one of the classical authorities on Bolivian history.
2 Klein, H., pp.236-240.
3 Ley de Participación Popular, Reglamento de las Organizaciones Territoriales de Base, Secretaría
Nacional de Participación Popular, Ministerio de Desarrollo Sostenible y Medio Ambiente, 1994.
sides to resolve their dispute, relying on economic incentives to speed their
agreement. Oversight Committees thus comprise a lean (their officials are unpaid),
corporatist form of social representation which is parallel to elected municipal
legislatures and serves somewhat like an upper house of parliament, as a check on
the power of mayors and municipal councils.4
4. One-hundred ninety-eight new municipalities – 64 percent of the total – were
created, and existing ones were expanded to include suburbs and surrounding rural
areas, to the point where the 311 municipalities exhaustively comprise the entire
The law heralded a new era of municipal government for the overwhelming majority
of Bolivian towns and cities. In many parts of Bolivia where before the state was present, if
at all, in the form of a local schoolhouse, health post and, perhaps, a military garrison or
customs office, each reporting to its respective ministry, there was now for the first time
elected local government accountable only to local voters.
2.2 Descriptive Statistics
The extent of the change is perhaps best appreciated by examining the changes in
resource flows that it catalyzed. Decentralization multiplied municipalities’ share of public
investment 17 times, from 0.7 to 12 percent of the total, and significantly altered its
distribution. Consider figure 1, showing revenue-sharing between central and local
governments for 1993, the last year prior to decentralization, and 1995, the first full year it
was in effect, for the capital and second city of each of the country’s nine departments.
Total resources devolved from central to local governments increased by 72 percent.
Though this is certainly significant, much more impressive is the change in the distribution
of these funds. Before decentralization the nine departmental capitals shared 93 percent of
all funds devolved from the center, leaving 7 percent for Bolivia’s other 302 municipalities;
the three leading cities, La Paz, Cochabamba and Santa Cruz, alone accounted for 86
percent of the total. After decentralization their shares fall to 38 percent and 27 percent
respectively. The per capita criterion results in a massive shift of resources in favor of the
smaller, poorer municipalities in Bolivia. Starting from a tiny or nonexistent base, these
districts see enormous increases in their transfers, collectively exceeding 15,000 percent in
Oruro, 43,000 percent in Chuquisaca, and 63,000 percent in distant Pando. The larger cities
listed see more modest gains, 5 and only La Paz suffers a net reduction in transfers, itself a
sign of how disproportionately it benefited under the old system. Within-department
breakdowns similarly show movement from extreme skewing of resources in favor of the
capitals to a more equitable distribution.
4 I am indebted to Dr. Teddy Brett for this insight.
5 This is possible only because of the large increase in total devolved funds.
% of Departmental
Total 223,525608,280172% --------------
Sources: Ministry of Finance, Ministry of Social Communication
* 1995 totals estimated due to incomplete reporting of budget data by both cities.
ROD = Rest of Department
Revenue Sharing (Bs'000)
Figure 1. Decentralization and the Regional Distribution of Public Funds
Water & San
as % of
Figure 2: Local v. Central Government Investment
The most important change wrought by decentralization, however, is to the
composition of investment. In our results in section 3 below, local government provides a
level of public goods different from central government due to its more accurate detection of
local preferences. Figure 2, which shows the investment priorities of central and local
government before and after decentralization, provides initial evidence in support of these
results. The front row corresponds to central government investment during 1991-93, and
the rear row to local government investments during 1994-96. The differences are quite
significant. In the years leading up to 1994 central government invested the largest sums in
transport, followed by hydrocarbons, multisectoral (a hodgepodge of projects difficult to
categorize), and energy. Together these four sectors account for 73 percent of total public
investment during 1991-93. But after decentralization local governments invest most
heavily in education, urban development, and water & sanitation, together accounting for 79
percent of municipal investment during this period. Of the sectors accounting for roughly
three-quarters of total investment in both cases, central and local government do not have
even one in common. Indeed, we have to descend to fourth place in the rear row to find a
sector – transport – that ranks highly in the front row as well, and even so it’s share of the
total has fallen by five-sixths. Thus, we find evidence that local and central government
have very different investment patterns.
Lastly, it is instructive to examine how investment was distributed geographically
among Bolivia’s municipalities before decentralization, and compare that to the current
regime. Although detailed maps of project locations and types are not currently available,
we can get a very rough sense of the distribution behind the sums by examining figures 3-5
below. These place all of Bolivia’s municipalities in a row on the horizontal axis and
measure investment per capita as vertical displacement. If the allocation of investment were
extremely skewed in favor of a few municipalities, we would expect to see most values
lying near the bottom of the graph and a few points strewn high above them. If the
distribution of investment were reasonably equitable across space, we would expect to see
most points in a broad band at some intermediate level.
Figure 3, per capita investment before decentralization, seems to conform to the first
pattern. It is certainly skewed, with investments in one district6 of over Bs.50,000 per head,
and two more7 in the neighborhood of Bs.20,000 per head, while the vast majority seem to
sit on or near zero. Compare this to the national average for this period of Bs.1,400 per head
and we see the extent of the imbalance. But the degree of skewing itself distorts the vertical
axis and compresses the lower range, where most of the values are. We turn to Figure 4,
which excludes the upper twelve observations and shows only those below Bs.2,000 per
capita, in order to examine these more carefully. Though the distribution now appears less
unequal, there is still monotonically increasing density as we move downwards, and a
preponderance of observations on or near the horizontal axis – 146 in fact, or half of the 298
in the plot. Our initial impression is confirmed. Investment under centralized government
was terrifically skewed in favor of a few municipalities that received enormous sums, a
second group where investment was significant and the bottom half of districts that received
nothing. Compare this with figure 5, which shows municipal investment after
decentralization. This chart shows no district over Bs.700 per capita, a broad band with
greatest density between Bs.100-200, and only a few points touching the axis. Average
municipal investment for this period is Bs.208 per capita, and thus our band contains the
mean. (The investment sums here are much lower because they exclude central government
funds.) The overall distribution is thus much smoother and more equitable than figure 4.
Although these are crude indicators, it would seem that central government, with a much
larger budget and free rein over all of Bolivia’s municipalities, chose an unequal distribution
of investment across space, while decentralized government distributes public investment
more evenly throughout the country.
6 Sabaya, Oruro, population 2,074.
7 Chimoré, Cochabamba, site of major highway works, and Ascención de Guarayos, Santa Cruz.
Figure 3: Investment Per Capita, 1991-93
0 50 100150200 250300
Municipal Identity No.
Figure 5: Local Investment Per Capita, 1994-96
050100 150200 250300
Municipal Identity No.
Figure 4: Investment Per Capita, 1991-93
0 50100 150200 250 300
Municipal Identity No.
Bs per capita
3.1 The Literature
Economists and political scientists have often disagreed on the question of the
needs-responsiveness of central v. local government. This is largely due to the focus that
each discipline gives to the problem. Economists such as Oates and Besley and Coate (see
below) tend to assume a better match between local government outputs and local
preferences, and accordingly find local government preferable when this advantage is not
outweighed by spillovers or inefficiencies in central government provision of public services
arising from distortions in their financing or production and allocation. Economists do not
agree on how this better matching come about, however, with some ascribing it primarily to
the character of the information involved, and others to local elections or institutions.
Political scientists, on the other hand, (see for example Crook and Sverrisson (1999) and
Smith (1985)) tend to concentrate more on interest group capture of the local political
process, and the distortions of political representation in small electoral environments.
When these phenomena exist, interest groups will gain a decisive influence over local
government, and decentralization will tend to favor these small local groups
disproportionately over everyone else. In this context, centralization can be preferable, as
interest groups which are sufficiently big locally to distort the local political process will
tend to be small in comparison to national government, which can then match policy to
(general) local needs in a disinterested fashion. We incorporate specific forms of these
insights into our model and then test them below.
We first examine the empirical literature on decentralization, and then turn to theory.
A large part of the empirical work on decentralized provision of public services reports
mixed results which, taken together, are inconclusive. Much of this literature approaches
the subject from a very broad perspective, examining such issues as fiscal flows, taxation,
expenditure and investment alongside very different questions such as managerial
efficiency, government responsiveness and political representativeness. The breadth of
these studies’ scope combined with their and small sample size make controlling empirically
for all the exogenous economic, social and institutional factors involved in decentralization
impossible. They also generally fail to specify a coherent theoretical framework which
credibly links all of the phenomena in question to specific decentralization measures in very
different national and cultural contexts. Attempting to summarize such work can be a
frustrating task as its findings are both numerous and diverse, and isolating cause-and-effect
relationships is difficult. Examples of the results in Andersson, Harsman and Quigley,
(1997), Bennet (1993), Cheema and Rondinelli (1983), Rondinelli et al. (1984), Rondinelli
(1981), and Veira (1967) include:
1. The performance of decentralized administrative units in Algeria, Libya and Tunisia
has been positive in some cases, but has not always met the original goals of policy
2. Decentralization and privatization of state activities have a tendency to create greater
inequities among communities and regions with different levels of organizational
capacity, opening the door for local elites to play a disproportionate role in the
planning and management of projects.
3. Devolution in Papua New Guinea increased popular participation in government,
and has improved the planning, management and coordination capacity of provincial
administrators, but has added to government bureaucracy and so weakened it’s
ability to attract foreign investment and stimulate long-term economic growth.
4. Decentralization has increased the access of people in previously neglected rural
regions and local communities to central government resources, if only
incrementally, in most of the developing countries where it has been tried.
5. The administrative and technical capacity of local organizations is said to be slowly
improving, and new organizations have been established at the local level to plan
and manage development.
6. National development strategy now increasingly takes account of regional and local
7. The absence of or weakness in supporting institutions needed to complement the
managerial capacity of local governments, as well as weaknesses in the linkages and
interaction between local and central administrations, have led to disappointing
results from decentralization in Africa and Asia.
Such studies tend to show that decentralization has achieved moderate success in
some countries, moderate failure in others, and both in many, with the underlying reasons
poorly identified. It is, as a result, difficult to judge whether specific decentralization
“failures” were due to inappropriateness of the policies implemented or weaknesses in their
implementation, and more difficult still to recommend improvements.
The theoretical debate on the effects of decentralization on social welfare and
efficiency is of higher quality. In terms of productive efficiency, central government should
be naturally superior so long as returns are at least slightly increasing. Any economic case
for decentralization must therefore invoke a counterbalancing source of efficiency in which
local government has an advantage. Different authors have approached the problem in
different ways. Tibet’s (1956) seminal work, reviewed in Rubinfeld (1987), posits a world
where individuals move costlessly among localities that offer different levels of provision of
a public good, and finds that the competitive equilibrium in locational choices which results
provides an efficient allocation of local public goods. Though the starting-point for many
analyses of decentralization, this work ignores central-government provision of public
goods, and is thus an inappropriate foundation for the present empirical study. More
importantly, it assumes a highly mobile population and fixed governments, which, more
than unrealistic, we consider exactly backwards. It seems self-evident that government is
the relatively mobile element in most local democratic systems, changing every electoral
period or two, whereas the population is essentially fixed over the 4-5 years that electoral
periods typically comprise. By invoking infinitely transportable individuals as the
mechanism which joins the supply of public goods to demand, Tiebout fundamentally
misses the point. “Voting with one’s feet” in this way is undoubtedly a valid mechanism for
preference revelation at the margins, and may be more important for particular public goods,
such as education. But the principal mechanism for joining demand and supply must
involve the political process. Indeed this is arguably why local government exists at all.
Oates (1972) examines heterogeneity in tastes and spillovers from public goods
through a model in which local government can tailor public goods output to local tastes,
whereas central government produces a common level of public goods for all localities. He
finds that decentralization is preferred in systems with heterogeneous tastes and no
spillovers; with spillovers and no heterogeneity, centralization is superior on efficiency
grounds. But Oates’ results rest largely on his assumption of uniform central provision of
public goods which, though an empirical regularity, is theoretically ungrounded and
problematic when viewed in the Bolivian context. Close scrutiny of the data (see section 2.2
above) shows that central government investment patterns were non-uniform during the
period we examine. Investment flows were concentrated in a few municipalities to such an
extent that public investment actually became uniform after decentralization. We thus
require a theory, which does not restrict central government choice so strongly. Besley and
Coate (1998) provide a model in which this restriction is lifted. Like Oates, they invoke
uniform taxation to finance public goods provision. But they then devise a model of central
policymaking in which elected representatives bargain over public goods provision in
multiple districts. For heterogeneous districts, they find that decentralization continues to be
welfare superior in the absence of spillovers, but centralization is no longer superior when
spillovers are present. They also find that higher heterogeneity reduces the relative
performance of centralization for any level of spillovers. This model is both more
representative of how real central governments operate, and more in keeping with the facts
of the Bolivian transition from centralized to decentralized provision. Our results below can
be interpreted as an indirect test of their findings, given reasonable assumptions about
representative local utility functions. Thus construed our results weakly support their
Bardhan and Mookherjee (1998) develop a model of public service provision which
examines the implications of decentralization for the targeting and cost-effectiveness of
public expenditure. They find that for provision of a merit good available on competitive
markets to the poor, decentralization dominates with respect to intercommunity targeting
and cost-effectiveness, though not necessarily for intracommunity targeting. For the
provision of infrastructure, decentralization dominates only if local governments are not
vulnerable to capture, local government has adequate financing, interjurisdictional
externalities do not exist, and local governments have all the bargaining power vs. public
enterprise managers. Somewhat more tangentially, Persson, Roland and Tabellini (1997)
examine how the separation of powers can lead to political accountability. They examine
how voters can combine incentives produced by elections and the separation of powers to
control moral hazard and reduce politicians’ rents under a variety of constitutional regimes
(presidential, parliamentary, etc). Under appropriate checks and balances, they find that
separation of powers helps voters elicit information about both politicians and the state of
nature. Though it examines a different question, this paper is highly relevant to our
empirical work, as the separation of powers is central to the design of the Bolivian system of
3.2 The Model
A country is made up of T districts, each with population nj where the subscript j
denotes district. Individuals, subscripted i, have linear utility Ui = xi + θib(gj) where xi is the
amount of private good consumed by individual i, gj is the amount of public good available
in district j, and θi is individual i’s preference for public good gj. We use θmj to denote the
local median preference for the public good in district j. We define local welfare as median
utility, Umj = xmj + θmjb(gj). The function of government is to provide public goods, which it
finances with a local head tax. We allow central government to have a cost advantage in the
provision of public goods, such that the head tax needed to finance a given level of
provision under central government is αgj/nj with 0<α≤1, whereas the tax under local
government is gj/nj. This cost advantage can derive from various sources, such as central
government’s superior technical knowledge or an organizational advantage which lowers
the cost of complex public goods, or traditional economies of scale.8,9 We also assume that
local government ascertains θmj accurately, whereas central government ascertains θmj with
probability p and θ-mj with probability (1-p). Probability varies as p∈[0,1], and we define θ-
mj as an unrestricted value of θ other than θmj.
Under decentralization, local government’s problem in district j is
8 Certain types of public health interventions, for example, require specialized technical knowledge which
central government may be able to obtain more cheaply than local government.
9 Note that α=1 implies no cost advantage.
where for simplicity we drop all subscripts j. Local government thus maximizes provision
of the public good given median local preference, which it finances with a head tax. Taking
first-order conditions and re-arranging, we get
The level of public good provided by local government is thus an implicit function of θm,
the median preference for the public good, and of the population n. Citizens receive the
level of public good that they prefer, which they pay for fully.
Central government’s problem is
We solve the equation for district j. Taking first-order conditions and rearranging we get
The level of public good provided by central government is thus an implicit function
not only of local median preference and population, but also of the probability that central
government correctly assesses local preferences, the difference between “true” local
preferences and those otherwise ascertained by central government, and central
government’s cost advantage.
Hereafter we refer to the amounts of the public good provided in equilibrium by
local and central governments, defined by equations (2) and (4) respectively, as gl and gc.
We assume that b′′(g)<0 and thus that utility is a strictly concave function of g. Comparing
the two equations, it is easy to see that, ceteris paribus, public goods provision under central
government will be higher than under local government when the former has a cost
advantage (α<1). Citizens will prefer central government which, for a given head tax
levied, provides more of the public good than does local government. This is clear from
figure 6(a), where central government’s cost advantage changes the slope of the budget line,
and allows the residents of j to move from a local-government equilibrium on Ul to the new
tangency on Uc where Uc>Ul.