How to "Delegate Power" Optimally? The Optimal Boundary of Administrative Centralization and Decentralization

Yao Dongmin, Zhang Shiqi

Journal of Finance and Economics Vol. 43, Issue 04, pp. 41 - 54 (2017)  DOI:10.16538/j.cnki.jfe.2017.04.004

Abstract

Streamlining government and delegating authorities, and combining delegation & regulation is one of the important contents of deepening the reform of the administrative system and transforming the functions of government. The policy of delegating power, reflects the transformation of the governments' power distribution pattern from centralization to decentralization and its essence lies in a kind of "administrative decentralization". From the perspective of the improvement of economic operation efficiency, namely the maximization of the utility of the central government, this paper constructs a dynamic game mode with three-level governments by modeling, gives the boundaries of centralization and decentralization, reveals the logic of decentralization policy, thus tries to provide a feasible idea for the study of optimal administrative decentralization, and uses this model to provide reasonable explanation of decentralization policy. It arrives at the following conclusions:firstly, without changes in social welfare, decentralization can improve economic operation efficiency by reducing information costs of the central government, which is the main aim of decentralization policy; meanwhile, "delegating power" may give rise to the hidden trouble of rent seeking of the low-level governments, so the punishment for rent seeking needs to be strengthened; the establishment of power list system strengthens the regulation of the exercise of rights of the middle-level governments and weakens their motives for the abuse of power; secondly, in terms of power with following features, decentralization is always optimal than centralization:light burden on costs of lower-level governments and small joint punishment; when the power is implemented, the goal differences in bottom governments and mutual influences are small; after the comparison with delegated power in all previous state documents, these delegated power can be better explained by these characteristics above; thirdly, the factors affecting the optimality of decentralization are shown as follows:the two factors, information costs and the punishment for the abuse of power of middle-level governments, are stronger than several characteristics of power itself, namely brought cost burden of the lower-level governments & the degree of joint punishment, and the goal differences in bottom governments & the externalities.

Keywords

streamlining government and delegating authorities; combination of delegation and regulation; power list; centralization and decentralization