Administrative federalism and a central government with regionally based preferences

Administrative federalism is defined as a constitution where the central state sets quality standards for public projects, and the local jurisdictions decide which projects are to be carried out. Decentralized decisions are inefficient because of an interjurisdictional spillover. A centralized decision is inefficient because the center favors one region and is restricted to distortionary instruments when redistributing between regions. For intermediate values of the spillover, it is shown that administrative federalism leads to a higher welfare than both centralization and decentralization. Moreover, because jurisdictions fear to be exploited, they only join a federation whose constitution is administrative federalism but not one with a fully centralized constitution.