1. Introduction
The move towards greater decentralization of fiscal policy is one of the most important political trends in recent decades (see Garman Haggarg, and Willis, 2001; and Hankla, 2008). Among the expected benefits of fiscal decentralization is that local governments can accommodate the heterogeneous preferences of households across jurisdictions. The normative theory of federalism identifies conditions in which a shift from a Pareto efficient but uniform provision of local public goods (LPGs) by a central government towards a Pareto efficient and differentiated provision of LPGs by a system of sub-national governments entails a nationwide gain in the welfare of residents (see Oates 1972, 1999).
However, critics of fiscal decentralization usually stress that, under interregional spillovers, the decentralized provision of LPGs will not be Pareto efficient. Some of the solutions provided in the literature for solving the externality problem in the provision of local public goods include the following alternatives: Oates (1972, 1999) identifies conditions in which LPGs with inter-regional spillovers should be fiscally centralized (instead of decentralized).1 Another solution is to preserve a fiscally decentralized provision of LPGs but a benevo-lent central government could implement Pigouvian intergovernmen-tal transfers to internalize spillovers from LPGs, see Oates (1999).
Myers (1990) develops a model of decentralized provision with benevolent governments, free mobility, and inter-regional transfers that sustain Pareto efficient local public goods without the intervention of the central government.2 Other applications of this type of model include Silva and Caplan (1997), Hoel and Shapiro (2003), and Mansoorian and Myers, (1993). However, Wellisch (1994) finds that central government intervention might still be needed if households are imperfectly mobile because the decentralized provision would be inefficient.
Inefficiencies in the decentralized provision of LPGs can also arise as a result of coordination failures among sub-national governments. A straightforward application of the Folk Theorem suggests that, in an inter-temporal setting, a decentralized Pareto efficient provision could be achieved if local governments are patient enough, and the cost of deviating from Pareto improving strategies is high enough.3
However, voting and legislative models cast doubts on whether the solutions to the problem of spillovers that depend on benevolent governments are compatible with weakly dominant strategies of candidates in elections, and of public officials in the legislature. For instance, the analyses of Lockwood (2002) and Besley and Coate (2003) suggest that the sub-national provision of LPGs with and with-out inter-regional spillovers is not necessarily Pareto efficient if policy choices are determined by a legislature.4,5
Recent analysis on political economy has focused on interest groups and fiscal federalism: Lockwood (2008) studies whether the decentralization theorem holds (see Oates, 1972) when collective choices are made by majority rule and lobbying. Bordignon, Colombo and Galmarini (2008) characterize conditions in which lobbying induces a decentralized provision with spillovers that is Pareto efficient when there is some optimal weight attached to social welfare (as opposed to money) but inefficient if politicians become too greedy. Guriev, Yakovlev and Zhuravskaya (2010) find that different measures of performance of firms improve for an economy with multi-state lobbies in comparison with local lobbies.
In this paper, I develop a political economy model with interest groups in a system of sub-national governments in which the provision of local public goods with and without spillovers is Pareto efficient. In my analysis ideological parties face a tradeoff between campaign contributions and the design of local public spending. In my model, families can contribute to parties participating in the local elections of different jurisdictions in exchange for a more favorable policy.6 Parties realize that they can attract campaign contributions from voters of different regions and, therefore, parties have incentives to recognize the full distribution of benefits from LPGs with regional spillovers. As a result, the decentralized provision of LPGs is Pareto efficient.
My paper is different from the previous literature, since the efficiency in the provision of LPGs does not require benevolent governments, perfect mobility of families, or the intervention of the central government. My analysis is also different from the literature on interest groups mentioned above, since I focus on the process of preference aggregation associated with the provision of LPGs and campaign contributions.7
My paper is also related to the literature on how different structures of governments can (or cannot) accommodate an inter-regional heterogeneous distribution of preferences into policy. In his seminal work, Oates (1972) considers that the decentralized provision of local public goods maximizes the society’s gains associated with matching the heterogeneous preferences of individuals with the government’s policies. However, recent models of political economy suggest that this might not necessarily be the case. For instance, the political process might produce the ideal policy of a minority coalition within the electorate (see Wittman, 1973, 1983; Myerson, 1993; and Roemer, 2001) instead of maximizing the wellbeing of the society, resulting in a suboptimal degree of policy differentiation.
In this paper, I also study whether local governments maximize the gains attributed by Oates (1972) to policy differentiation once I relax the assumption that governments are benevolent social planners. In particular, I compare the relative merits of decentralization in matching the heterogeneous preferences of voters with economic policies both with and without campaign contributions. To the best of my knowledge, I am the first to provide such analysis. In this paper, I show that an increase in the heterogeneity of preferences over local spending does not necessarily lead to a more differentiated provision of LPGs. In particular, if local public goods do not show spillovers or if the spillovers are moderate, then the more heterogeneous the preferences of voters for public goods across districts, the more heterogeneous is the inter-regional provision of public goods. In this case, a system of local governments can successfully accommodate different preferences of households across jurisdictions.
However, if spillovers of LPGs for districts with a high demand for public spending are sufficiently large or if heterogeneity of preferences is significant, then the more heterogeneous the inter-regional preferences of voters, the higher the political incentives for the low-demand district to free ride. In this case, even if local preferences are heterogeneous, only the local government with a sufficiently high demand for public spending provides a public good while the low demand district free rides. This result means that the inter-regional distribution of voters’ preferences could change without a corresponding change in the provision from local governments. This outcome also means that local governments do not necessarily maximize the society’s gains attached to matching the preferences of voters with the provision of local public goods.8
Finally, in this paper I develop a comparative analysis of the incentives to differentiate the supply of LPGs according to inter-regional differences in preferences for economies with and without campaign contributions. I show that for an economy in which campaign contributions are not allowed, the decentralized provision of LPGs does not maximize the society’s welfare gains attached to policy differentiation because parties select a policy to maximize the welfare of a minority coalition in the electorate (parties do not select policy to maximize the welfare of the society).
However, in an economy with campaign contributions, local governments select the ideal policy of a weighted average voter (that is to say, parties select middle-of-the-road policies) and therefore, a system of local governments provides public goods that maximize the society’s welfare gains from matching local spending with the heterogeneous preferences of voters.
This paper is structured as follows: the baseline voting model with ideological parties and without campaign contributions is developed in section 2. I develop a model with ideological parties and campaign contributions in section 3. Sections 2 and 3 show the relative efficiency outcomes in the provision of LPG’s for economies with and without campaign contributions. The comparative analysis of LPGs in the political equilibriums with and without campaign contributions is also provided in section 3. Section 4 concludes.
2. The model
Consider an economy with districts i and −i and n
i
= 1, 2 . . . . . . N
i
individuals in each district such that N
i
=6 N
−i
. Preferences of a household j living in district i are
The parameter
2.1. Political equilibrium without campaign contributions
In this section I develop a partisan voting model to rationalize the provision of local public goods in a system of sub-national governments. I assume that parties have preferences over policies because this model can explain recent empirical evidence that suggests that the tax and spending policies of parties at the sub-national level diverge. In particular, recent evidence suggests that administrations identified ideologically as “left-wing” increase subnational taxes and choose more progressive fiscal policies relative to administrations identified as “right-wing”.10
In my economy, conflicts among residents in the same district and among voters of different districts over the size of local public goods arise because of the heterogeneity of preferences and endowments of voters in the economy. The collective choice that solves the problem of differences among voters over fiscal policy is the delegation of the design of public spending to a policy maker elected in a local election. In a two party system, candidates in districts i and −i compete in elections in each district by proposing a fiscal platform constituted by a head tax on residents that finances the provision of a local public good in the district. Parties have preferences over local fiscal policy since parties are controlled by a coalition of voters with preferences over fiscal outcomes (see Wittman 1973, 1983; Roemer 2001).
The timing of the political process is as follows: in the first stage, candidates announce policies. The types (or preferences) of parties are common knowledge. In the second stage, voters observe the candidates’ platforms and vote sincerely for the policy that maximizes the their preferences over local spending. I follow the literature (see Persson and Tabellini, 2002) by assuming that voters are rational, forward looking and well informed about the parties’ preferences over public spending. All residents in each district vote in the local election. Voters do not have mobility across jurisdictions.11
I also distinguish the type of voters through the intensity of their preferences for LPGs. Hence, the indirect utility of a voter type αi
j in district is given by
In the third stage, the candidate with the highest plurality of the votes wins the election, forms the local government in each district (the winning party takes all) and implements the policy platform that maximizes the party’s utility. In this setting, the party’s problem of local public spending design is to maximize the preferences of the average member of the coalition of voters controlling the party subject to this voter’s budget constraint and the constraint that LPG’s are financed by local taxation. Formally, the problem of policy design is
In (1), ν mi (g i , g −i , α mi ) is an indirect utility over feasible local public goods, x mi = e mi − t i is the budget constraint of the representative voter controlling party m = {L, R} in district i, αmi is the party’s type and it is exogenously given, g i = N i t i ∀i is the government’s budget constraint.
DEFINITION 1. The subgame perfect Nash equilibrium (SPNE) for this economy is
characterized by policy choices and
1.i) In the first stage, parties announce policies
1.ii) In the second stage, voters type
1.iii) In the third stage, the elected party implements
DEFINITION 2. A candidate m = L ∨ R wins the election in district i, if, for a strictly non-decreasing monotonic cumulative distribution function Ωi: IR → [0, 1], it is satisfied that
Definition 2 says that, given the policies of parties, if there is at least a majority of
voters with
PROPOSITION 1. Suppose some party m = {L ∨ R} in district i, ∀i satisfies the
condition of majority vote
PROOF. In district i, if party m satisfies
Similarly, the local election in district −i produces
Proposition 1 shows that the size of
In this equilibrium, Pareto inefficiency arises because the political process fails to account for the preferences of the whole electorate. This equilibrium is Pareto efficient if local public goods do not show spillovers and if the type of coalition of voters controlling the government coincides with the type of the average voter in the district. However, this can be considered as a peculiar outcome. Hence, in general, ĝmi is not Pareto efficient.
2.2. Local public goods in a fiscally decentralized economy
The normative literature on fiscal federalism suggests that a system of local governments will provide local public goods that are differentiated according to the inter-regional heterogeneity of preferences over public spending (see Oates 1972, 1999). Proposition 2 shows that there is a class of equilibria in which preferences over districts i and −i are differentiated but only the district with the high demand for public spending provides a positive level of the local public good while the low demand district free rides and does not provide a local public good. Formally,
PROPOSITION 2. If local public goods do not show spillovers, or there is moderate inter-regional heterogeneity of preferences, then an increase in the heterogeneity of preferences leads to more differentiation in the provision of public goods of districts i and −i. However, if spillovers are sufficiently large, or there is significant heterogeneity of preferences, then an increase in the heterogeneity of preferences does not necessarily lead to more differentiation of public goods between districts i and −i.
2.i) For ki =k-i=0 then
2.ii) For
2.iii) For
PROOF. Results are directly implied by the first order conditions of the parties’ problem and condition (4) of proposition 1 for districts i and −i.
Proposition 2 shows that an increase in the heterogeneity of preferences does not necessarily means more policy differentiation in the provision of local public goods of districts i and −i. In particular, if local public goods do not show spillovers (for ki = k−i = 0) and for local public goods with moderate spillovers k−i ∈ [0 , 1) : 0 ≤ ki < Θi, where Θi = N −iαm−i /N i αmi < 1, the more heterogeneous the parties’ preferences over local public goods or the larger the difference between the size of population of districts i and −i (that is, the larger the difference between N iαmi and N −iαm−i ), the more heterogeneous is the provision of LPG’s between districts i and −i with ĝmi > 0 and ĝm−i > 0. In this class of equilibria, an increase in the heterogeneity of preferences for LPG’s leads to more policy differentiation in the provision of local public goods of districts i and −i.
However, if spillovers of local public goods for the high demand district are sufficiently large, for k−i ∈ [0 , 1) , Θi < 1 : 0 < Θi ≤ ki, then the more heterogeneous the preferences of the elected parties and the population in districts i and −i, the higher the political incentives for the district with low demand for local public spending to free ride, in which case, ĝmi = N i αmi > 0 and ĝm−i = 0. Hence, only the government with the high demand for public spending (district i) provides a local public good while the local government with the low demand for public spending (district −i) does not provide a local public good.
More importantly, this outcome means that there could be an increase in the inter-regional heterogeneity of preferences of parties for local public goods and yet the provision from local governments does not respond to changes in the inter-regional preferences of parties. For instance, in this case, there are changes in αm−i such that the heterogeneity of preferences across districts increase, however the equilibrium supply of LPG’s remains unchanged and given by ĝmi = N i αmi > 0 and ĝm−i = 0.
In this last equilibrium, a system of local governments does not maximize the societys gains associated with policy differentiation because a fiscally decentralized system of governments might not respond to changes in the heterogeneity of preferences across districts. This outcome is explained by two factors: first, parties maximize the utility of a minority coalition of voters instead of a social welfare function, hence the political process leads to a failure of preference aggregation. Therefore, the supply of public goods by subnational governments does not necessarily maximize the society’s gains associated with policy differentiation.
Second, because of strategic interactions between local governments, the local provision of public goods might not respond to changes in the heterogeneity of preferences of voters across districts. To see this, note that if the inter-regional distribution of preferences for public goods is too heterogeneous or there are significant spillovers then the provision of a public good by the high demand jurisdiction (district i) drives the party’s net marginal benefit of providing a local public good in district −i to zero. In this case, the best response of the elected government in district −i is to free ride and set ĝm−i = 0.
Hence, there could be a change in the heterogeneity of preferences of voters for LPG’s of districts i and −i and still the local provision of public goods does not respond to an increase in the heterogeneity of voters’ preferences. This outcome, calls into question the notion that a system of local governments maximizes the society’s gains associated with matching the inter-regional preferences of voters with the provision of LPGs.
3. Political equilibrium with campaign contributions
In this section, I characterize an economy in which voters can make campaign contributions to parties participating in local elections of districts i and −i. The timing of the political process is as follows: In the first stage, voters offer a platform-campaign package to parties in which different campaign contributions correspond to different levels of local public spending. Political contributions seek to influence the design of public spending. Each voter makes an offer knowing that the rest of voters are, simultaneously and non-cooperatively, offering their corresponding platform-contribution packages. Also, in the first stage, parties announce their policy platforms14
In the second stage, voters observe the candidates’ platforms and vote sincerely for the policy that maximizes the voters’ own preferences. Voters are sequentially rational and recognize that after the election takes place (in the third stage), the party winning the election takes all and implements the policy that maximizes the party’s preferences over public spending and the size of campaign contributions.
Following the literature, including Grossman and Helpman (2001), and Bernheim and Whinston (1986), and for simplicity of analysis, I ignore the issue of the dynamic inconsistency of the parties’ policies since campaign contribution take place at the first stage and the implementation of policy in the third stage. In a model with repeated interactions between voters and parties, through sequential elections, there is an equilibrium in which parties commit to their promises to voters to change policy for contributions to guarantee future contributions from voters. However, such analysis is left for future work.
For the analysis that follows, I characterize the indirect preferences over public goods of a voter type
The voter’s budget constraint is
Moreover, the parties’ preferences over local public spending are given by:
Where
DEFINITION 3. A subgame perfect Nash equilibrium for the economy is characterized by the parties’ policy announcements g∗mi and g∗m−i, by the voters’ contributing choices c∗ j mi ∀ m = {L , R} and voting choices in districts i and −i such that:16
3.i) In the first stage, voters in all districts offer platform-campaign contributions
schedules
Where
Moreover,
Also, in the first stage, parties announce policies g*mi ∀m, ∀i that maximize the parties’ preferences over local public goods and the size of campaign contributions C*mi such that:
3.ii) In the second stage, voters type
3.iii) In the third stage, the elected party in each district implements g*mi ∀m, ∀i.
The main difference between my political equilibrium with campaign contributions in this section, and the equilibrium of the last section is that in this section, voters of all districts provide a platform-campaign contributions offer
The incentive compatibility constraint says that a voter type αi makes a campaign contribution to some party m = L or R (that is
Proposition 3, below, characterizes the subgame perfect Nash equilibrium for an economy with campaign contributions and shows that the decentralized provision of local public goods with and with-out spillovers is Pareto efficient.
PROPOSITION 3. In the SPNE, assume some party m = {L ∨ R} satisfies
∀i is the weight that the elected candidate in district i assigns to the preferences of voters of district i and −i such that the weights are allocated as follows:
Where
PROOF. The problem is solved by backward induction. In the third stage of the game
Where
In the first stage of the game, voters type
Parties will accept campaign contributions in exchange for changes in public spending if 18
From (12), it follows that the government’s tradeoff between political contributions of voters of type αi j ∀m, ∀i and changes in local public spending is given by
The voters’ political contribution problem in (11) can be solved by selecting the ideal spending policy of voter type
State the problem in (14) as follows:
The first order condition for the problem of voters’ type
And
Where
The size of contributions of voter type
and
Substitute (16) and (17) into (10) to show that
Define
in district i assigns to preferences of voters of district i and −i such that
Therefore condition (18) is equivalent to
As I mentioned before, parties realize that they can attract campaign contributions from voters of different regions by offering changes in the parties’ policy positions. In fact, parties may face a tradeoff between campaign contributions and the design of local public spending: On the one hand, parties would like to design policy to benefit their local supporters, but on the other hand, they recognize that they can offer changes in local policy in exchange of campaign contributions from voters living in other jurisdictions.
Hence, proposition 3 says that the tradeoff between policy platforms and campaign contributions induces the party controlling the local government in each district to recognize the distribution of marginal benefits of g∗mi over all residents in district i plus its external benefits over residents of district −i against the marginal costs of providing g∗mi. As a result, the SPNE in (8) leads to a fiscally decentralized provision of local public goods with and without inter-regional spillovers that is Pareto efficient. Condition (8) is a modified Samuelsonian condition of the equilibrium provision of LPG’s. In particular, the left hand side of condition (8)
In what follows, proposition 4 shows that the inter-regional heterogeneity of preferences is linked with the incentives of local governments to provide (and to free ride in the provision of ) a local public good in their corresponding districts.
PROPOSITION 4. The distribution of local public goods for districts i and −i for the political equilibrium with campaign contributions is given by:
4.i) For ki = k−i= 0, g*mi > 0 and g*m−i > 0 : g*mi ≠ g*m−i satisfying
4.ii) For
4.iii) For
PROOF. Fromproposition (3), g*mi ∀i,−i is given by
Condition (21) leads to a system of two equations that correspond to the equilibrium conditions for g*mi and g*m−i. Solve the system and reduce terms to show that g*mi is given by
The Cournot-Nash equilibrium is
Define
Proposition 4 has a similar interpretation to that given in proposition 2, and it shows that an increase in the heterogeneity of voters’ preferences over public spending does not necessarily lead to greater policy differentiation in the local provision of public goods for an economy with campaign contributions. In particular, if local public goods do not show spillovers, then their provision is differentiated according to
If the heterogeneity of preferences is moderate or the spillovers are also moderate (see conditions 4.ii)), then the supply of public goods is also differentiated with
However, if the heterogeneity of preferences is sufficiently high or if spillovers are sufficiently high (see condition 4.iii)) then the party’s marginal benefit of producing a local public good in the low demand district will be below its marginal cost and therefore only the high demand district will produce a public good with
This outcome is explained by the strategic interaction between local governments in districts i and −i. When there is too much heterogeneity, the local government with high demand for local public goods has incentives to provide a local public good in district i that is g∗m−i > 0. Through the effect of spillovers of g∗mi in district −i, the marginal benefit for parties in district i of providing a local public is driven below its marginal cost. As a result, the local government of district −i free rides and sets g∗m−i = 0.
Therefore, there could be a change in the heterogeneity of preferences of voters for LPG’s of districts i and −i without a corresponding change in the local provision of public goods. This outcome also high-lights the limitations of a system of local governments in maximizing the society’s gains associated with matching the inter-regional preferences of voters with the provision of LPGs.
One interesting question is whether the issue of free riding from the low demand district is more prevalent in an economy in which campaign contributions are not allowed (see proposition 2), or in which they are allowed (see proposition 4)? Proposition 5 provides a simple comparison between the results in propositions (2) and (4) and identifies sufficient conditions under which the provision of local public goods with campaign contributions might reduce the incentives of the low demand district to free ride. This proposition shows that a system of local governments in which campaign contributions are allowed is more likely to maximize the society’s gains associated with matching the inter-regional preferences of voters with the provision of LPGs. Formally:
PROPOSITION 5. For
Where
Then the strategic interaction between elected local governments and the special interests groups for an economy with campaign contributions reduces the incentives of the district with the low demand for local public goods to free ride relative to the incentives to free ride in the political equilibrium without campaign contributions.
PROOF. The electoral-economic equilibrium for an economy without campaign contributions implies, from proposition 2.iii), that ∃ k−i ∈ [0 , 1) , Θi = N −iαm−i /N i αmi: Θi < 1 and 0 < Θi ≤ ki ⇒ ĝmi = N i αmi > 0 and ĝm−i = 0. Similarly, from the equilibrium with campaign contributions (in proposition 4.ii)), ∃ k−i ∈ [0 , 1) , Θi = γ-i/γi<1 with
Let
For Ni, N−i ∊ R++,
Under the political equilibrium without campaign contributions (see proposition 1), the provision of local public goods reflects the ideal policies of the minority coalition of voters that is in control of the elected party in each district. If parties take into account only the preferences of a minority coalition of voters in the electorate then local public policy could be extreme or polarized (implying that the provision of public goods could be too high or too low) if the preferences of voters in control of the party are not moderate.
Therefore, in this type of equilibrium, the heterogeneity of preferences across districts could be high leading to the outcome in which the district with low demand for local public goods free rides and only the district with the high demand for public spending provides a LPG. Also, recall that in this case, there could be an increase in the inter-regional heterogeneity of preferences of parties for LPGs and yet the provision from local governments does not respond to changes in the inter-regional preferences of parties.
In the political equilibrium with campaign contributions (see proposition 3), local public goods reflect the ideal policies of residents of all districts of the economy, and therefore, the provision of LPGs with campaign contributions leads to more moderate policies relative the distribution of public goods under the equilibrium with-out campaign contributions, (see conditions 24 and 25).20 It follows that if policies are moderate then the district with the low demand for local public spending has less incentives to free ride. Hence, it is more likely that the provision of local public goods is positive in each district and differentiated according to the inter-regional differences in the voters preferences.
Hence, proposition 5 identifies conditions in which a system of local governments in an economy with campaign contributions maximizes the welfare gains associated with the differentiation of local public goods while, in an economy without campaign contributions, a system of local governments is likely to produce suboptimal inter-regional policy differentiation. This outcome is explained by the fact that, for an economy with campaign contributions, local public goods are supplied as if local governments select public spending to maximize a weighted social welfare function.
In addition, in the equilibrium with campaign contributions, policies are more moderate than the corresponding policies adopted in the equilibrium with no campaign contributions. As a result, for an economy without campaign contributions, policies could be more extreme and then the difference between gˆmi − gˆm−i > 0 is larger which makes more likely that the marginal political benefits of producing gˆm−i in the low demand district falls below its marginal cost, in which case, district −i free rides and the supply of local public goods in the federation is gˆmi > 0 and gˆm−i = 0.
4. Conclusion
In this paper I analyze the fiscally decentralized provision of local public goods with and without inter-regional spillovers in a political economy model with and without campaign contributions. In my economy, parties recognize that they can offer to change their local policy on public goods in exchange for campaign contributions from local residents and voters living in neighborhood jurisdictions. Due to this possibility, a tradeoff exists between the parties policy platforms and campaign contributions that induces local governments to recognize the distribution of marginal benefits of local spending over all districts in the economy. As a result, the fiscally decentralized provision of local public goods with and without inter-regional spillovers is Pareto efficient.
I also show that, an increase in the heterogeneity of preferences over local spending does not necessarily lead to a more differentiated provision of LPGs. In particular, if the heterogeneity of preferences is moderate and local public goods show low or moderate inter-regional spillovers, then the provision of local public goods is differentiated according to the heterogeneity of the parties’ preferences in the equilibrium with no campaign contributions and the distribution of preferences of all voters of all districts in the equilibrium with campaign contributions. In this case, an increase in the heterogeneity of preferences induces local governments to recognize the more heterogeneous preferences and their supply of local public goods across districts is differentiated according to this heterogeneity.
However for economies without campaign contributions and with sufficiently large spillovers or high heterogeneity of preferences, only the high demand district provides a public good and the low demand district free rides. In this case, an increase in the heterogeneity of preferences does not necessarily lead to more inter-regional policy differentiation.
Finally, in this paper I develop a comparative analysis of the incentives of local governments to maximize the society’s welfare gains associated with matching the heterogeneous preferences of voters with the provision of local public goods for economies with and without campaign contributions. For an economy without campaign contributions, the decentralized provision of local public goods does not maximize the society’s gains from policy differentiation since public spending seeks to maximize the preferences of a minority of voters in the electorate. However, campaign contributions induce ideological parties to recognize the whole distribution of preferences of voters in all districts and local public goods maximize the society’s gains from policy differentiation.
In addition, in the equilibrium with campaign contributions, policies are more moderate (relative to the policies without campaign contributions), so it is more likely that the provision of local public goods is positive in each district and differentiated according to inter-regional differences in the voters’ preferences. In contrast, in the equilibrium without campaign contributions, the provision of local public goods is positive only in the high demand district. In this latter case, changes in the parties’ preferences for local public goods might not result in corresponding changes in the inter-regional provision of LPGs.