Yardstick competition under fiscal and administrative asymmetries : rent-seeking and local cooperation

Abstract

This paper develops a two-period model to investigate how fiscal and bureaucratic asymmetries shape yardstick competition (YC), inter-municipal cooperation (IMC), and rent-seeking in local public service provision. Unlike previous approaches, we allow incumbents to invest in bureaucratic efficiency, influencing both service quality and delivery time. Voters observe outputs but not rents, creating electoral incentives that interact with structural disparities. Our analysis shows that these asymmetries distort YC, biasing accountability and altering cooperation incentives. While IMC can reduce service gaps, it may also weaken electoral discipline and facilitate cooperative rent extraction, especially under moderate disparities or high fixed costs. We demonstrate that rent extraction does not always move inversely with service provision: when bureaucratic improvement costs are low, incumbents can deliver higher service quality while extracting larger rents. Numerical illustrations confirm that, in most configurations, incumbents optimally reduce bureaucratic efficiency to create slack for rent extraction. Policy implications include the need for performance benchmarks that account for structural conditions, targeted reforms to reduce efficiency gaps, and transparency mechanisms in cooperative arrangements. These findings challenge conventional assumptions linking service quality to governance and highlight the importance of structure-adjusted accountability frameworks.