Decentralizing Development : Allocating Public Goods Via Competition

Decentralizing the allocation of public goods by giving funds directly to communities takes advantage of local information concerning needs, but decreases the accountability over how funds are used; leaving funds open to misuse or capture by local elites. In Indonesia, the World Bank attempts to overcome this downside of decentralized allocation by having communities compete locally for block grants. Competition weeds out less efficient projects. Increasing the number of villages bidding by 10% leads to a 1.8% decline in road construction costs. Microcredit gives a measure of the diversion of funds, since in the initial phase of this program microcredit involved little monitoring and low repayment rates. Competition reduces the funds allocated to microcredit. Hence competition between localities for development funds has a significant impact on efficiency. Similarly, increased community participation in project planning and in the allocation of funding leads to better outcomes