The theory of administrative federalism: An alternative to fiscal centralization and decentralization

Under administrative federalism, the central state sets quality standards f or public projects and the local jurisdictions decide which projects are ca rried our. Decentralized decisions suffer from an interjurisdictional spill over: The central stare cannot distinguish between useful and useless proje cts, It is shown that administrative federalism is always preferable to dec entralization. This is due to die distinction between the net benefit of in creasing the qualify level for all projects and the net benefit of carrying out an additional project. If the information problem is sufficiently impo rtant, administrative federalism also is preferable to centralization Final ly, it may even implement the first best solution.