A Principal-Agent Building Block for the Study of Decentralization and Integration

The architecture of public decision making in the world is being changed through processes of "economic integration" and of "decentralization". Some policy decisions are now taken at a higher level (i.e., monetary policy in Europe, trade policy in part of South America), while others are taken by smaller political units "closer to the people" (i.e., health and education policies in many Latin American countries). We provide a building block for the study of such processes, emphasizing the trade-off between the advantages of centralized decision making (internalization of externalities) and those of decentralized decision making (increased principal-agent control by the citizens). We do so within the context of a class of principal-agent models known as common agency.