Devolution, independence, and the optimal provision of public goods

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. (C) 2015 Published by Elsevier Ltd.