Electoral Competition, Decentralization, and Public Investment Underprovision

The paper analyzes the optimal level of decentralization in local-public-good provision. Although all voters pay for such investments, only a subset benefit from them; their rate of return, however, is positive. Through pork-barrel projects, which do not increase welfare, any resource allocation is realizable. Candidates competing in local and national elections therefore face a trade-off between targetability and efficiency, which causes some profitable projects to be discarded. Decentralization affects underinvestment because the share of the electorate who benefit from an investment and the share of total budget absorbed by its costs depend on the size of that electorate.