DP13893 Sharing a Government
This paper develops a simple theoretical framework to study a set of regions, each
with its own regional government, who share a union or central government. These
governments must decide whether to implement or discard a large number of projects
that produce local benefits for the region that implements them, and externalities for
the rest of the regions. Conflict or disagreement arises since different regions value
projects differently. The classic assignment problem consists of deciding who decides
these projects, either the union or the regional governments.
It is well known that regional governments are insensitive to externalities. The key
observation here is that the union government is insensitive to local beneÖts. Thus,
each government maximizes only a piece of the value of projects, and disregards the
other one. This observations leads to simple and clear rules for solving the assignment
problem.
