In this study, we examine the effect of yardstick competition on the level of public good provision under shared accountability, which is the co-financing of public goods by upper and lower governments. It is well known that partial expenditure decentralization, where different levels of government share costs, leads to the under-provision of public goods compared with the socially optimal level (Joanis (2014)). This occurs because rent-maximizing politicians have a free-riding incentive (a vertical political externality) to place the cost burden on the other level of government.We investigate whether the introduction of yardstick competition, which allows voters to compare public service levels across jurisdictions, can mitigate this under-provision. Our analysis yields three key findings. First, yardstick competition alleviates the under-provision of public goods. Second, this positive effect is decreased by the distortion caused by the asymmetric vertical political externality—what Joanis (2014) terms “shared accountability.” Third, when asymmetric vertical political externality exists and yardstick competition is sufficiently prevalent, the efficacy of yardstick competition regarding achieving the efficient provision of public goods is limited and suppressing vertical political externality is more effective.
Tanaka et al. (Thu,) studied this question.