DP9514 Centralization and Accountability: Theory and Evidence from the Clean Air Act

Author(s): Federico Boffa, Amedeo Piolatto, Giacomo AM Ponzetto
Publication Date: June 2013
Date Revised: June 2014
Keyword(s): Air pollution, Elections, Environmental policy, Government accountability, Imperfect information, Interregional heterogeneity, Political centralization
JEL(s): D72, D82, H41, H73, H77, Q58
Programme Areas: Public Economics, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9514

This paper studies fiscal federalism when regions differ in voters? ability to monitor public officials. We develop a model of political agency in which rent-seeking politicians provide public goods to win support from heterogeneously informed voters. In equilibrium, voter information increases government accountability but displays decreasing returns. Therefore, political centralization reduces aggregate rent extraction when voter information varies across regions. It increases welfare as long as the central government is required to provide public goods uniformly across regions. The need for uniformity implies an endogenous trade off between reducing rents through centralization and matching idiosyncratic preferences through decentralization. We find that a federal structure with overlapping levels of government can be optimal only if regional differences in accountability are sufficiently large. The model predicts that less informed regions should reap greater benefits when the central government sets a uniform policy. Consistent with our theory, we present empirical evidence that less informed states enjoyed faster declines in pollution after the 1970 Clean Air Act centralized environmental policy at the federal level.