The provision of public inputs in a federation under asymmetric information

In recent years informational problems have been introduced into local public finance. The main impetus of the analyses has been on the supply of local public goods, often under tax competition. The present paper extends recent contributions to study how inter-regionally mobile capital supplied by the first-period consumption-savings decision of the private sector is taxed in a closed federation to fund well informed local governments that differ in their costs of providing public inputs. The modified Samuelson-conditions for the optimal supply of local public inputs are derived and analyzed for different informational environments and instrumental abilities of the federal government. There exists a tendency to oversupply the public input in the low cost region which is also present in a numerical simulation where different informational environments are compared to the first-best and tax competition.