Decentralized provision of services allows communities to adapt to local variations
in preferences. However, surveys show that central regulation of local sector
revenue, spending, and borrowing decisions is pervasive. This article argues that
one rationale for central regulations is to prevent local authorities from distorting
allocation decisions in order to drive up intergovernmental grants. By limiting the
local sector's discretion to act strategically, regulations give the government leeway
in setting grants.
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