Economics · Fiscal Federalism
Oates' Decentralisation Theorem (1972) in fiscal federalism concludes that the assignment of expenditure responsibilities to sub-national governments is welfare-improving primarily because:
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- 1Sub-national governments can internalise cross-border spillovers more effectively than the centre
- 2The central government faces a harder budget constraint than local governments
- 3Decentralisation allows public good provision to be tailored to heterogeneous local preferences✓
- 4Sub-national governments have superior tax collection capacity compared to the centre
Correct answer
Decentralisation allows public good provision to be tailored to heterogeneous local preferences
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