Accountability and Decentralization in Government: An Incomplete Contracts Model

This paper approaches the question of the appropriate level of decentralization of power in government as a problem in the allocation of control rights under incomplete contracts. This approach is preferable to that of the literature following the Tiebout model of local public goods, which analyses the merits of the differentiation of policy by locality but has nothing to say about the decentralization of power as such. The model of this paper compares allocations of power to regional and central government as alternative means of motivating governments to act in the interests of citizens. Centralization allows benefits from policy coordination but has costs in terms of diminished accountability, which can be precisely defined as the reduced probability that the welfare of a given region can determine the re-election of the government. The model is extended to allow for conflicts of interest within regions, and for the possibility that governments may act as Leviathans appropriating resources for their own use. Conditions are derived under which a given region will be better off under central or regional government.