CENTRALIZED PROVISION OF PUBLIC GOODS: STATIC VS DYNAMIC PERFORMANCE IN THE PRESENCE OF POLITICAL PRESSURE, LOBBYING AND HETEROGENEITY OF TASTES

Oliver KOPPEL (University of Cologne)

This paper analyses the efficiency of centralized public goods provision in a model of incomplete contracts. Politicians determine the level of provision through wasteful yet publicly unobservable lobbying efforts. Thereby a threat of dismissal from office caused by regional expectations in terms of reservation utility induces politicians to push for a high influence of their region's taste. In a static setting the performance of central governance is solely hampered by larger diversity of regional preferences. On the contrary, in a repeated game setting the ability to cooperate depends crucially on voter expectations. Via endogenous discounting it can be shown that rather too much national pressure hinders efficiency-sustaining cooperation. Contrasting static results furthermore high levels of heterogeneity within regional preferences support the implementation of efficient outcomes.