Pooling sovereignty under the subsidiary principle

This paper investigates the decision whether to centralize public policy in an economy with two levels of government. I show that centralization based on the subsidiarity principle emphasizes rather than resolves a conflict of interest between jurisdictions. The extent of the conflict of interest depends on spillovers and differences in tastes for public spending. Spending decisions are determined by negotiation between local representatives in the centralized legislature. If an agreement cannot be reached, policy is determined non-cooperatively by local governments. Results show that pooling sovereignty by the subsidiarity principle fails to fully internalize spillovers and may lead to a misallocation of public resources.