Optimal Structures for Decentralized Provision of Roads

Abstract

Local governments are increasingly responsible for the provision of roads. Arguments for decentralization assume that local agencies have a better understanding of local demands and are better able to allocate scarce resources and deliver services at lower costs. Counterarguments suggest that losses in economies of scale due to decentralization outweigh potential gains. We develop a model to measure the effects of decentralization of road provision. Using a 35-country panel data set we measure the impact of decentralizing expenditures for construction, maintenance, and administration. We find that decentralization results in lower unit costs of maintenance while unit costs of administration which initially decline with increasing degrees of decentralization, may increase when approaching total decentralization. Construction costs seem to be unaffected by the level of decentralization. Road user costs are only affected by decentralized maintenance. These results suggest that the gains to be made from decentralization depend on the type of activity being decentralized.