Essays on the decentralisation of democratic institutions
This is a thesis on the political economy of decentralisation. Part one analyses the effects of fiscal and electoral decentralisation on the accountability of public officials. Chapter 2 introduces a model of repeated elections to public office. The interaction between voters and officials is seen as a principal-agent relationship. Within this framework, two potential justifications for political decentralisation are provided. It is shown that voters may strictly prefer to limit the funds they allocate to a public office by setting up more than one office (fiscal decentralisation). A smaller budget implies a stronger incentive for the officeholder to try to be re-elected. The second argument for political decentralisation is that splitting up the electorate into homogeneous jurisdictions (electoral decentralisation) implies that the voters will tend to have more control over the use of public funds by the officials. Chapter 3 introduces asymmetric information into the model. Officeholders are assumed to have better knowledge of the technological conditions under which public funds are provided. Asymmetric information gives rise to an information rent for the officials. Total information rents can be limited by having more than one bureau and the voters using relative performance evaluation for their re-election decisions (=electoral yardstick competition). It is also shown that fiscal decentralisadon can be beneficial to the voters, if they are better informed about the local rather than the federal conditions of public goods provision. Part two studies the political economy of the transition from a collectivist economy to a market economy. Chapter 4 develops a general equilibrium model of income distribution and risk-taking. The formation of entrepreneurial and working classes as well as the allocation of talent are derived endogenously. In a market economy, no insurance can be provided due to the non-observability of output (and employment) in private firms. The more able and the less risk averse individuals tend to become entrepreneurs. Inefficiencies arise due to insufficient risk-taking. A different (second-best) balance is reached in a collectivist economy where output is shared equally. In this case, non-observability implies that workers will not reveal their talent and managers will not reveal the productivity of their plant. It is shown that either of the two systems may overall dominate the other in terms of the majority criterion or even the Pareto criterion. Different forms of transition from collectivist to market-based production are considered. A total (or "big bang") reform is viewed as the collectivist sector being closed down completely and all individuals having to move to the competitive sector. Gradual reform is viewed as the free migration of individuals between the collectivist sector and the competitive sector. This leads, in general, to a dual economy. A majority of individuals may want to leave the traditional sector to try their luck in the modem sector and, therefore, vote for reform. Despite this, under both gradual and total reforms, a majority of individuals may ex post regret the changes and vote for a return to the collectivist system. It is also shown that the majority choice between total reform, gradual reform and no reform is always transitive. Moreover, gradual reform is never the most preferred option for the majority. These results may be useful for interpreting some of the developments in the economies in transition.