The Political Economics of Policy Centralization

Abstract

The aim of this thesis is to get a better understanding of how centralization affects the efficiency of policy making. To analyze this, the chapters in this thesis deal with political incentive problems. The chapters have in common a set of assumptions on the institutional setting in which centralized policy making takes place. First, the centralized policy making setting is modeled as a legislature consisting of local representatives. For this reason, the models are most applicable to loose federations such as the EU, where there is no (strong role for a) federal executive. In addition, the political process is set up as an agency problem, where citizens within a member state of the federation act as principals to their political agent. In this set up, centralization a¤ects the incentives for the principals. As I will treat preferences as given, this means that centralization alters the constraints on policymaking, for example through cost-sharing.

Two elements of the models developed in this thesis are worth mentioning. The first - that may not be too restrictive for the taste of most economists - is that all actors (including voters) are fully rational and maximize their individual utility. Readers who believe that this assumption is too restrictive may consider the outcomes of the thesis as benchmark cases. In addition, all chapters assume perfect information, which indeed may seem restrictive to economists as well. Clearly, it is well worth exploring how imperfect information affects the results. In the concluding chapter, I discuss some papers that deal with centralization issues when some actors are imperfectly informed.

The chapters in this book are positive in the sense that, given the assump- tions, they aim to uncover the mechanisms through which centralization may lead to failures in policy making. Wherever possible, I have formulated these mechanisms as hypotheses that can be falsified by empirical analysis. How- ever, in this thesis I only make a limited attempt to confront theory with data. To defend this, it should be borne in mind that the object of the study (inefficiency in policy making) is difficult to observe. Certainly, there is much anecdotal evidence on political failure. However, hard systematic data are mostly missing. One could resort to studying the relation between centralization and policy outcomes such as overspending and corruption, but then one treats the political mechanism through which these come about as a black box.

Even if empirical evidence on the effects of centralization is missing, when the assumptions are judged not to be overly restrictive, the models can be used for normative analysis. I will do so where appropriate. These rec- ommendations will take the form of institutional arrangements. A follow- up question, beyond the scope of this book, is whether these institutional arrangements will be chosen by rational actors. In the concluding chapter, I will briefly discuss some work that deals with such endogenous political institutions.