Are local agreements on equalization grants possible? A bargaining model with quasi-linear local preferences on local public goods

The art. 13 of the Italian law n. 42/2009 theoretically allows for local negotiations between municipalities on the allocation of equalization funds. However, in the subsequent practice and legislation, such form of local negotiation has never been adopted. A question arises from the Italian experience: in the presence of a predetermined equalization scheme decided by the central government, are local agreements on equalization transfers possible? In this paper we show that, in the presence of quasi-linear local preferences on public goods, there is no space for alternative local agreements on the allocation of equalizing transfers in the presence of predetermined schemes decided by the central government. Our results suggest that similar practices, when allowed, are destined to have scarce success. We also show that, if the central government does not provide a predetermined scheme, local agreement on equalization funds are viable.