Government market power and public goods provision in a federation

In standard models of fiscal federalism, tax competition among subnational jurisdictions depresses government expenditures. Centralization therefore increases government spending, assuming that both local and central governments are price takers in the market for public goods. If the central government has greater market power than constituent jurisdictions, then centralization may be associated with reduced government spending. Whether centralization or decentralization provides more public goods depends on the relative strengths of tax competition and market power. In an illustrative example, decentralized public goods spending can range from 25 to 120% of centralized spending.