On the optimal allocation of responsibilities among national and subnational governments

This paper introduces a model for optimizing local public goods provision across national, regional, and local government tiers. We analyze how spillovers, preference heterogeneity, and economies of scale affect centralization versus decentralization decisions. Three key insights emerge: (a) Adding regional governments to the model creates subnational solutions for inter-local spillovers, (b) Preference heterogeneity incentivizes decentralization, (c) Economies of scale favor centralization for efficiency gains. The optimal responsibility distribution depends on these three competing forces' interplay. Our model integrates previous studies' insights into a unified theory encompassing the primary forces influencing centralization-decentralization decisions across government tiers.