Abstract
Public services are often provided by lower level agencies that are funded by higher level government. Since markets for such services do not exist, normal pressures to minimize costs do not operate; indeed, usually these costs are unobservable. We study a principal-agent model which emphasizes the distinction between the financing and provision of public services. Two broad situations are analyzed: (i) the agencies are induced to reveal true costs; and (ii) in addition, to minimize costs, agencies must be induced to exert effort. The characteristics of the optimal funding contract and the marginal cost of public funds are derived in each case.
Similar content being viewed by others
References
Atkinson, A.B. and Stern, N.H. (1974). Pigou, taxation and public goods. Review of Economic Studies 41: 119–128.
Auerbach, A.J. (1987). The theory of excess burden and optimal taxation. In A.J. Auerbach and M.S. Feldstein (Eds.), Handbook of public economics, 61–127. Amsterdam: North Holland.
Baron, D. and Myerson, R. (1982). Regulating a monopoly with unknown cost. Econometrica 50: 911–930.
Besanko, D. and Sappington, D. (1987). Designing regulatory policy with limited information. London: Harwood Academic Press.
Bewley, T.F. (1981). A critique of Tiebout's theory of local public expenditure. Econometrica 49: 713–740.
Boadway, R. and Keen, M. (1993). Public goods, self-selection and optimal income taxation. International Economic Review 34: 463–478.
Boiteux, M. (1956). Sur la gestion des monopoles publics astreints à l'equilibre budgétaire. Econometrica 24: 22–40.
Browning, E.K. (1978). The burden of taxation. Journal of Political Economy 86: 649–671.
Cornes, R. and Silva, E. (1996). Transfers between jurisdictions with private information: The equity-efficiency tradeoff. Unpublished manuscript.
Cremer, H., Marchand, M. and Pestieau, P. (1996). Interregional redistribution through tax surcharge. International Tax and Public Finance 3: 157–173.
Laffont, J. (1994). The new economics of regulation ten years after. Econometrica 62: 507–537.
Laffont, J. and Tirole, J. (1993). A theory of incentives and procurement in regulation. Cambridge: MIT Press.
Lockwood, B. (1996). Inter-regional insurance with asymmetric information. Unpublished manuscript.
Mikami, K. (1993). Providing public goods with distortionary taxes. Public Finance 48: 76–91.
Oakland, W.H. (1987). Theory of public goods. In A.J. Auerbach and M.S. Feldstein (Eds.), Handbook of public economics, Volume II, 485–535. Amsterdam: North Holland.
Pigou, A.C. (1947). A study in public finance. 3rd edition. London: Macmillan.
Raff, H. and Wilson, J. (1997). Income redistribution with well-informed local governments. International Tax and Public Finance 4: 407–427.
Schob, R. (1994). On marginal cost and marginal benefit of public funds. Public Finance 49: 87–100.
Stiglitz, J.E. (1982). Self-selection and Pareto efficient taxation. Journal of Public Economics 17: 213–240.
Stiglitz, J.E. (1987). Pareto efficient and optimal taxation and the new new welfare economics. In A.J. Auerbach and M.S. Feldstein (Eds.), Handbook of public economics, Volume II, 991–1042. Amsterdam: North Holland.
Tiebout, C.M. (1956). A pure theory of local expenditures. Journal of Political Economy 64: 416–424.
Tuomala, M. (1990). Optimal income tax and redistribution. Oxford: Clarendon Press.
Usher, D. (1986). Tax evasion and the marginal cost of public funds. Economic Inquiry 24: 563–586.
Wildasin, D.E. (1984). On public good provision with distortionary taxation. Economic Inquiry 22: 227–243.
Wildasin, D.E. (1986). Urban public finance. Chur, Switzerland: Harwood Academic Press.
Wilson, J.D. (1991). Optimal public good provision with limited lump-sum taxation. American Economic Review 81: 153–166.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Boadway, R., Horiba, I. & Jha, R. The provision of public services by government funded decentralized agencies. Public Choice 100, 157–184 (1999). https://doi.org/10.1023/A:1018325609859
Issue Date:
DOI: https://doi.org/10.1023/A:1018325609859