VOTING, LOBBYING, AND THE DECENTRALIZATION THEOREM

Abstract

This paper revisits the well‐known fiscal “Decentralization Theorem” by relaxing the role of the assumption that governments are benevolent, while retaining the assumption of policy uniformity. If, instead, decisions are made by majority voting, the theorem fails. Specifically, (i) centralization can welfare‐dominate decentralization even if there are no externalities and regions are heterogeneous and (ii) decentralization can welfare‐dominate centralization even if there are positive externalities and regions are homogeneous. Similar results are obtained if a benevolent government is subject to lobbying. Hence, the Decentralization Theorem is not robust to relatively minor deviations away from the benchmark of a purely benevolent government.

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