Quality of institutions, rent-seeking, and inter-jurisdictional cooperation

The differing fiscal needs of municipalities introduce bias into yardstick competition among local administrators driven by pure rent-seeking motives. The influence of institutional quality on this bias varies across cases, sometimes alleviating it, while in other instances exacerbating it. Inter-municipal cooperation provides incumbents with control over political yardstick competition. However, this alliance compromises the quality of public services when rent extraction is a priority. To address the issue of collusion and enhance accountability, the central government may find it counterproductive to uniformly improve institutional quality across all districts. Instead, a more effective approach may involve targeted policy interventions in specific districts, considering the varying levels of fiscal and institutional disparities. By doing so, the central government can disrupt the incentive for collusion and rent extraction among local incumbents.