PUBLIC GOOD AND INCREASING COST

摘要: We suppose a federation with two tiers of government. The central authority wishes to maximize the social welfare while the local authorities aim at individualistic utility maximization. There exist two types of local governments characterised by different utility, cost and income. The centre lacks precise information concerning what type of cost (high or low) each region is. This study examines how asymmetric information affects the design of the transfer scheme. We show that when the recipient region highlights an income greater than the contributor, then, disregarding the production cost for the public good, a first best outcome is attainable and the incentive compatibility constraints are not binding and therefore the complete information scenario provides the same results as the incomplete one. On the other hand if the contributing region is wealthier with respect to the receiver, then just a second best outcome is reachable in order not to violate the incentive compatibility constraint.