Centralization vs. Decentralization: A Principal‐Agent Analysis

Abstract The decision to allocate policy jurisdictions to different levels of government is related to a number of trade‐offs between the advantages and disadvantages of centralized versus decentralized provision of public services. A trade‐off central to many discussions is that between the internalization of externalities under centralization versus an “accountability” advantage of decentralization. In this paper we formalize this trade‐off in the context of a class of principal–agent models known as common agency.