The Economics of Multi-level Governance: on the Benefits of Overlapping Jurisdictions

Abstract: The paper explores the design of institutional framework based on several “levels” of governance (i.e. when an order is implemented by governance mechanisms applied to nested sub-sets of a population of agents). In the fiscal federalist literature, centralization of governance at high level, draws the benefit of a uniform order, to the costs of adaptation to local specificities. In this literature, the government should have a multi-level structure because it must provide public goods with various scopes in term of externalities. We provide an alternative explanation for the coexistence of several layers of governance. The root of this coexistence lies in complementarities among levels — in the spirit of the notion introduced by Milgrom and Roberts (1990) to analyze organizational complementarities: the effectiveness of one level is reinforced by the presence of another level. What we stress here is the fact that each level has strength and weaknesses and that the coexistence of levels is a way to overcome some of these weaknesses in order to improve efficiency at the “system level”; namely the efficiency of the overall institutional framework. Even in the case of a single public goods with given characteristics, we argue that efficiency could lead to their provision by several level of governance among which a principle of checks and balance would play; while fiscal federalism would recommend compliance with the principle of subsidiarity.