Centralization and Accountability: Theory and Evidence from the Clean Air Act

Abstract: This paper studies fiscal federalism when voter information varies across regions. We develop a model of political agency with heterogeneously informed voters. Rentseeking politicians provide public goods to win the votes of the informed. As a result, rent extraction is lower in regions with higher information. In equilibrium, electoral discipline has decreasing returns. Thus, political centralization e¢ ciently reduces aggregate rent extraction. The model predicts that a region's benefits from centralization are decreasing in its residents' information. We test this prediction using panel data on pollutant emissions across U.S. states. The 1970 Clean Air Act centralized environ- mental policy at the federal level. In line with our theory, we find that centralization induced a differential decrease in pollution for uninformed relative to informed states.