ACCOUNTABILITY AND DECENTRALIZATION IN GOVERNMENT - AN INCOMPLETE CONTRACTS MODEL

This paper approaches the question of the appropriate level of decentr alisation of power in government as a problem in the allocation of con trol rights under incomplete contracts. The model of the paper compare s allocations of power to local, central and regional government as al ternative means of motivating governments to act in the interests of c itizens. Centralisation allows benefits from policy coordination but h as 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 extende d to allow for conflicts of interest within regions, and externalities between central and local governments in a federation. It is also app lied to determining levels of fiscal transfer between localities, and to circumstances where governments may act as Leviathans appropriating resources for their own use.