Devolution, independence, and the optimal provision of public goods

Stiglitz, Joseph E.

This paper examines whether two regions should remain together within a fiscal federation, or separate, when their inhabitants have different preferences for publicly provided goods. The paper focuses on trade-offs between returns to scale in the provision of the goods, and the scope to tailor provision to the tastes of the inhabitants in each region. A general model is developed that includes, as special cases, both pure public and publicly provided goods, and regional and national public goods. We show that when there is a choice between public investment and consumption goods, there will, in general, be a bias against public consumption goods unless taxing powers are fully devolved. We provide conditions under which independence may be desirable even when the region contemplating independence is relatively small.


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Economics of Transportation

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February 5, 2019