Decentralized Budgeting Procedures for Public Expenditure

This article discusses the allocation of public expenditure among competing services. Some countries such as Italy use a double budget constraint; that is, the top level sets total expenditure and its allocation between competing services, whereas other countries just define the total budget. The article examines different ways in which the relationship between the agencies involved is structured and shows that the choice among competing systems depends on the objectives pursued by the agents involved and on the information structure. The analysis shows that tighter budget rules such as those implied by a double budget constraint might be optimal; that is, autonomy in decentralization is not always the best alternative. A second interesting conclusion is that a functional decentralization might enable Central Government to extract the information rent its agents command, but in this case the incentive structure must avoid collusion among the actors involved.