Fiscal federalism and lobbying

Which government functions should be decentralized (resp. centralized) once lobbying behavior is taken into account? We find that the answer largely depends on how the interests of the regional lobbies are positioned with respect to the function to be decentralized (resp. centralized). When regional lobbies have conflicting interests, then lobbying is less damaging for social welfare under centralization than under decentralization. On the contrary, when regional lobbies have aligned interests, then lobbying is less damaging for social welfare under decentralization, provided that policy spillovers; on the non-organized groups are not too strong. (C) 2008 Elsevier B.V. All rights reserved.