Department of Economics

The institutional level at which policies should be determined is an important issue that has been extensively treated in the economics literature. In particular, the literature has discussed to what extent decentralization of policy decisions give an inefficient outcome. With a homogeneous population and perfect population mobility, as it conventionally is modeled, the following result is derived for a very general class of economies with interregional interactions: A socially efficient outcome is a Nash equilibrium of the game of decentralized and uncoordinated policy setting. However, if decisions about migration take a longer time to make than decisions of policy changes, the general result above no longer holds. With this decision sequence decentralization may give an inefficient outcome also in situations where the decentralized outcome is efficient in the absence of population mobility.