Fiscal Federalism, Local Public Works and Corruption.

In fiscal federal systems, local public works that generate spillovers are often financed by transfers from higher levels of government. In this article, we consider a governmental hierarchy composed by a Federal and a Local Government. The former delegates to the latter the task of finding a firm to undertake a local public work. As the Local Government has more information about the efficiency of the firm, it communicates its private information to the Federal Government which decides the way to fund the project.