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Abstract:

Many countries still use federal fuel taxes as the main instrument to charge for road use. Recently, urban road pricing and regional distance charging have gained momentum, increasing opportunities for future decentralized decision-making. However, whether leaving road pricing decisions to regional authorities is a good idea is not a priori clear. Previous political economy models have suggested that in the large majority of cases decentralization yields higher welfare than federal pricing decisions. In this paper, we extend a political economy model of a two-region federation to show that this conclusion does not hold once we allow for commonly observed institutional constraints on federal decision making. We show that requiring user prices to be uniform across regions greatly improves the efficiency of centralized decision making. The same holds when federal decisions are the result of a legislative bargaining process among elected regional representatives. Importantly, under these institutional constraints, federal decisions may easily outperform decentralization; this will be the case when road users have large political majorities and there are substantial spill-overs across regions. Finally, the model also explains under what conditions such constraints will automatically be embedded in the federal constitution. Specifically, if regions are symmetric and drivers have a majority in both regions, we show that they will voluntarily transfer power to the federal level if a uniform pricing constraint is constitutionally imposed. However, if drivers have a majority in one region only, the region where non-users have a majority will never agree to transfer decision power to the federal level.