Two-Tier Government and Public Good Provision

Abstract

This paper studies public good provision and the equity-efficiency trade-off in a three-tier hierarchy. A Prime Minister, an inequality-averse utilitarian planner, is at the top, the citizens at the bottom and a Spending Ministry in between. The citizens are privately informed about their public good preferences vis à vis the Prime Minister, nevertheless the Spending Ministry can observe, in some states of the world, citizens' preferences. Introducing different levels of information raises the possibility of collusion between the Spending Ministry and interest groups at the expense of the Prime Minister. The results show that the possibility of favoritism towards targeted specific groups provides a justification for adopting less informational-sensitive policies involving more inequality in the society.

Keywords

JEL codes