Deterioration of Public Capital and Optimal Policy of Local and Central Government

Abstract

Deterioration of public capital in the US has been reported to be in crisis since the mid 1970s. There is an argument which insists that the deterioration is caused by the shortage of expenditure on the maintenance of public capital. The budget allocation for maintenance is not a technological problem. The purpose of this paper is to analyse the following three issues by describing both local and central government behaviour. First, the optimal conditions for the allocation of maintenance expenditure are examined. Secondly, the impact of the differences in preference of residents for public capital used for amenity and maintenance is examined. Finally, we examine the condition for the case where provision of subsidy from the central government to a local government creates a large loss of efficiency.

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