Public co-financing of private sector's investments - Subsidiarity and corruption

The literature on corruption makes unclear predictions on the relations between subsidiarity principle, according to which public decisions should be done at the lower level government possible, and corruption of public officials. In this paper, we compare two alternative regimes, centralised vs. decentralised, for the public co-financing of private projects. We show that, in the absence of corruption, the two regimes give the same results. Borrowing from the Chamberlin's analysis of monopolistic competition and from the rent-seeking literature, we introduce corruption in the model as a selling cost for the private suppliers. We show that a centralized regime causes higher corruption levels because of the higher number of private suppliers of competing projects. As a result, a central government tends to have a higher level of public capital expenditure than two (equally corruptible) regional governments.