THE CASE FOR DECENTRALIZATION

In Chapter 2, we outlined the general principles of expenditure assignment and discussed in general terms the kinds of responsibilities that could be decentralized to the states. In this chapter, we consider expenditure assignment in more detail. The application of the general principles to specific types of expenditure functions is discussed, as well as some additional problems that arise in coordinating state provision of expenditure programs with national objectives.

It might be worth briefly recalling and summarizing the key arguments for decentralization of expenditures to put the following discussion into context. The following arguments constitute the case for decentralizing expenditure responsibilities. These have also been briefly discussed in earlier chapters.

Catering to Regional Preferences and Needs

The classic argument for decentralization (Oates, 1972) is that different states have different demands for types and levels of public goods and services. This variation may simply come from personal preferences of the residents themselves, perhaps arising from cultural differences or other sources of heterogeneity across states. Or it may come from more objective factors such as geographic differences (e.g., terrain, population density), demographic differences (age structure of the population), or relative price or cost differences.