Paper #1664

Title:

Sharing a government

Author:

Jaume Ventura

Date:

July 2019

Abstract:

This paper develops a simple theoretical framework to study a set of regions, each with its own regional government, who share a union or central government. These governments must decide whether to implement or discard a large number of projects that produce local beneÖts for the region that implements them, and externalities for the rest of the regions. Conáict or disagreement arises since di§erent regions value projects di§erently. The classic assignment problem consists of deciding who decides these projects, either the union or the regional governments. It is well known that regional governments are insensitive to externalities. The key observation here is that the union government is insensitive to local benefits. Thus, each government maximizes only a piece of the value of projects, and disregards the other one. This observations leads to simple and clear rules for solving the assignment problem.

Keywords:

European integration, centralization and decentralization, public goods, externalities, fiscal federalism.

JEL codes:

D72, D79, F15, F55, H77

Area of Research:

Macroeconomics and International Economics

Published in:

Journal of the European Economic Association, 17 (6), 2019, 1723-1752

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