The theory of administrative federalism: An alternative to fiscal centralization and decentralization

Under administrative federalism, the central state sets quality standards for public projects and the local jurisdictions decide which projects are carried our. Decentralized decisions suffer from an interjurisdictional spillover: The central stare cannot distinguish between useful and useless projects, It is shown that administrative federalism is always preferable to decentralization. This is due to die distinction between the net benefit of increasing the qualify level for all projects and the net benefit of carrying out an additional project. If the information problem is sufficiently important, administrative federalism also is preferable to centralization Finally, it may even implement the first best solution.