Why does centralisation fail to internalise policy externalities?

We provide an explanation why centralisation of political decision making results in overspending in some policy domains, whereas too low spending persists in others. We study a model in which delegates from jurisdictions bargain over local public goods provision. If all of the costs of public goods are shared through a common budget, policy makers delegate bargaining to ‘public good lovers’, resulting in overprovision of public goods. If a sufficiently large part of the costs can not be shared, underprovision persists because policy makers delegate bargaining to ‘conservatives’. We derive financing rules that eliminate the incentives for strategic delegation. Copyright Springer Science + Business Media, Inc. 2005