Working Papers

It is well-known that competition for factors of production, including competition for residents, affects the public services provided in the communities. This paper considers the determination of local investment in urban transport systems. Many specialists question the effectiveness of the current U.S. top-to-bottom transportation institutional arrangement in which the federal government plays a dominant role and recommend a shift toward a decentralized organization. We examine how such a shift would affect the levels of transport investment. Specifically, we consider a model of two cities, and assume, as in Brueckner and Selod (2006), that transport systems are characterized by different time and money costs. We compare the outcomes reached when the transport system is decided by a central authority (a state or federal government) to the one decided by each jurisdiction in a decentralized way. In the latter case, city or local transportation authorities choose the system that maximizes residents’ welfare, taking as given the decisions made elsewhere, essentially competing for residents (or workers). Our analysis shows that even though a shift toward a decentralized arrangement of the transportation system would generally lead to overinvestment (relative to the centralized case), the extent of this bias depends on the specific factors that drive transport authorities in deciding the transportation system, on the landownership structure, and on the financing arrangements in place. The paper also shows that, in a more general setup, when the two cities differ in their productivity levels, the more productive city will tend to overinvest in transportation systems that connect the two cities, and the less productive city will tend to underinvest in those systems.