Decentralization and spillovers: A new role for transportation infrastructure

doi:10.1016/j.ecotra.2017.09.002

Economics of Transportation

Volume 13, March 2018, Pages 36-47

https://doi.org/10.1016/j.ecotra.2017.09.002 Get rights and content

Abstract

Inter-regional spillovers of local public goods are the main cause of decentralization failure. Assuming that the quality of transportation infrastructure policy affects the strength of inter-regional spillovers, we compare a one-step scheduling design, in which all policies are chosen simultaneously, with a two-step scheduling design, in which transportation infrastructure policy is used to influence local public goods policies. We show that decentralization failure could be partially solved with scheduling design. When regional governments correctly schedule their policies, citizens benefit from the same level of public goods but with lower taxes. Moreover, the two-step scheduling design results in a lower quality of transportation infrastructure and a higher intensity of local public goods. However, the overproduction of local public goods with positive externalities cannot be excluded.

Introduction

The regional economic literature has extensively discussed the link between the quality of transportation infrastructure and welfare (Krugman, 1991, Fujita et al., 1999). Despite different views and opinions, scholars have both theoretically and empirically demonstrated that the quality of transportation infrastructure has a positive impact on both inter-regional trade and regional growth (Martin and Rogers, 1995, Martin and Ottaviano, 1999, Melo et al., 2013). However, less attention has been paid to the impact of transportation infrastructure on inter-regional spillovers, especially those related to the provision of local public goods. In this paper we describe the impact of transportation infrastructure on inter-regional spillovers of local public goods.

Since institutional design affects both the intensity of local public goods and the quality of transportation infrastructure (Qian and Roland, 1998, Lizzeri and Persico, 2001, Boadway and Shah, 2009, Proost et al., 2011), it is important to study both policies within the same framework, and within the current debate on decentralization. The understanding that decentralization is optimal only in the absence of inter-regional spillovers is a milestone in the literature on public economics (Oates, 1972, Besley and Coate, 2003). Decentralization fails when regional governments only consider the local effects of internal policies in their own region, and several scholars have shown that the centralization of power is able to solve the problem of inter-regional spillovers efficiently.¹

In this paper we assume a set of public transportation infrastructure that links two (homogeneous) regions. People living in one region can use the transportation infrastructure to benefit from the local public good of the other region. This implies that there are inter-regional spillovers of local public good, but that the strength of the spillovers is affected by the quality of the transportation infrastructure. We assume that welfare has a private and a public component, as will become clear below. To improve welfare, regional governments could invest in either their own local public good or the quality of transportation infrastructure.

We principally compare one- and two-step scheduling designs. In the former, the quality of the transportation infrastructure and the provision of local public goods are determined simultaneously. In the latter, the quality of the transportation infrastructure is determined in the first step, and the provision of local public goods in the second step.

By comparing the two scheduling designs both a lower quality of transportation infrastructure and a higher intensity of local public goods emerge in the two-step scheduling design. Moreover, we show that the scheduling design does not affect the public component of welfare but only impacts on the private component of welfare. Finally, assuming positive externalities, overproduction cannot be excluded when the quality of the transportation infrastructure affects the inter-regional spillovers of local public goods.

The paper is structured as follows. Section 2 reviews the literature. Section 3 develops the model and derives the public-sector decisions for various institutional designs. Section 4 shows the main results on efficiency and provides a numerical illustration of the policy mix. Some extensions of the model are presented in section 5, and conclusions are drawn in section 6.

Section snippets

Literature

This paper adds to the literature on transportation infrastructure and decentralization (for a survey, see De Borger and Proost, 2012a, De Borger and Proost, 2012b, De Borger and Proost, 2015). Scholars focus on transportation infrastructure mainly because it has specific features and various kinds of spillovers (e.g. traffic congestion and smog) that are unlike other goods.²

The model

We consider a country composed of two identical regions, $i = 1,2$ , in which regional governments define both the intensity of the local public goods (one in each region) and the quality of transportation infrastructure (between the regions). Let $g_{i} > 0$ be the intensity of the local public good in region i; $t_{i} > 0$ the quality of inter-regional transportation infrastructure in region i; and $S > 0$ the strength of positive inter-regional spillovers of the local public good.⁴

Discussion

In this section, we analyze the implications of one- and two-step scheduling decision-making on the quality of transport infrastructure, the intensity of local public goods, and the level of the components of welfare. Proposition 4 describes the impact on the transportation infrastructure, t:

Proposition 4

The two-step scheduling design has the lowest quality of transportation infrastructure.

Proof

From the first equation in the systems (8) and (17), we show that $u^{'} (g^{B}, t^{B}) < u^{'} (g^{D}, t^{D})$ . Using $u^{″} (g, t) < 0$ , we find that $u^{'} (g^{D}, t^{D})$

Extensions

In this section, we describe three additional institutional designs. First, we assume a two-step scheduling design where the governments negotiate between them and use inter-regional transfers to achieve horizontal coordination. Second, we assume asymmetry between the regions’ institutional designs, i.e. one region adopts the one-step scheduling design and the other region adopts the two-step scheduling design. Finally, we study a two-step scheduling design where the timing of policies is

Conclusions

The public goods offered by governments generally have spillovers. Local public goods are public goods that can be used either by the residents of a local community or by the mobility of the non-residents.¹³

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^☆: I thank Marco Alderighi, Jan K. Brueckner, Alberto Iozzi, Claudio Piga and Federico Revelli for their helpful discussions and useful suggestions. I am also grateful for comments from the participants who attended the XVII Conference of the Italian Association of Transport Economics and Logistics and the Regional Studies Association Annual Conference 2016. Moreover, I would like to thank both the anonymous reviewers for their helpful and constructive comments that greatly contributed to improving the final version of the paper and the Guest Editor Bruno De Borger for his generous comments and strong support during the review process. However, any shortcomings in the paper are entirely my responsibility.

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Decentralization and spillovers: A new role for transportation infrastructure☆

Abstract

Introduction

Section snippets

Literature

The model

Discussion

Extensions

Conclusions

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J. Public Econ.

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Transp. Res. Part B Methodol.

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Res. Transp. Econ.

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Any need for coordination of policies towards transit traffic with a negative local externality?

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Fiscal Federalism: Principles and Practices of Multiorder Governance

Transportation infrastructure investments and trade liberalization

Jpn. Econ. Rev.

Fiscal decentralization with distortionary taxation: Tiebout vs. tax competition

Int. Tax Public Finance

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Natl. Tax J.

Regional resilience: theoretical and empirical perspectives

Camb. J. Reg.

Asymmetric federalism and the political economy of decentralization

Policies to Reduce Traffic Externalities in Cities, Center for Economic Studies - Discussion Papers ces12.10, Centrum Voor Economische Studiën

The political economy of pricing and capacity decisions for congestible local public goods in a federal state

Int. Tax Public Finance

Do cost-benefit analyses influence transport investment decisions?

Transp. Rev.