Decentralized provision of merit and impure public goods

In some countries reforms of public service provision have been accompanied by a parallel process of devolution. However, the application of fiscal federalism has not always produced the desired effects. We argue that this result may depend on two factors: a) a lack of coordination causing a non-optimal allocation of resources at aggregate level; b) a lack of incentive to coordination. In our model we assume that goods to be provided at local level are impure public goods. This assumption allows us to consider a more realistic scenario where the production and consumption of the local public good do not necessarily coincide. In an environment with full information and no restriction on the quantities to be provided as the one we propose, fiscal federalism is always suboptimal for the whole community, as it may be expected. However, we show that this does not necessarily mean that in fiscal federalism each local authority is worse off. This implies that coordination is never the outcome of the strategic interaction between the actors and that when the assumption of symmetric information is removed, Central Government will have to expect some local authorities to play strategically against such intervention.