INCENTIVES AND OPTIMAL SIZE OF LOCAL JURISDICTIONS

A model of optimal territorial decentralization is presented in which smaller local governments have an informational advantage concerning p ublic goods' production costs and the central government has imperfect information on spillover effects induced by local projects. The atten tion is focused on the optimal size of local entities and on the shape of transfer schedules from the central government to local jurisdicti ons. The optimal territorial organization is a compromise between smal l jurisdictions so as to benefit from the geographical proximity effec t on information and large entities in which spillover effects are mor e easily internalized by means of linear or non-linear taxation scheme s implemented by the Centre.