Central Regulation of Local Authorities

Abstract

Decentralized provision of services allows communities to adapt to local variations in preferences. However, surveys show that central regulation of local sector revenue, spending, and borrowing decisions is pervasive. This article argues that one rationale for central regulations is to prevent local authorities from distorting allocation decisions in order to drive up intergovernmental grants. By limiting the local sector's discretion to act strategically, regulations give the government leeway in setting grants.