Optimal territorial design and decentralization

Abstract

We consider a multi-tier government in charge of providing a bun- dle of public goods to a large and diverse population. Public goods differ in both their provision cost and their access cost for the citizens. We characterize the optimal territorial organization, i.e. the number of tiers and jurisdictions per tier, their administration capacity and the range of public goods provided at each tier. The shape of the territorial organization depends on the valuation of the administrations' capacity and of the public goods, and on the provision costs and access costs. Low valuation parameters in comparison to the cost parameters lead a country to adopt a territorial organization with a tall pyramid shape, i.e., a large number of tiers composed of few jurisdictions with limited competences. By contrast, if valuations are high relative to costs, the territorial pyramid is small and jurisdictions provide a wide range of public goods. In any case, going down the territorial pyramid, the jurisdictions' range of competencies increases but their administration capacity decreases. We then investigate the impact of decentralized decision-making. Even though subnational governments have an incentive to carry out some competencies assigned to other tiers, the social planner can implement the tiers' first-best scopes without altering the first-best territorial pyramid. However, we show that the optimal territorial organization under decentralization entails a lower number of tiers, with more jurisdictions per tier and larger ranges of competences.