Is There an Optimal Structure for Decentralized Provision of Roads?

September 1996 Generally, local maintenance of roads is more efficient than centrally controlled maintenance. For road construction, contracting procedures and competitive bidding are more important than issues of decentralization. Central governments should regulate safety and other network externalities. Humplick and Moini-Araghi empirically investigate how decentralization affects the efficiency of road provision from the viewpoint of the local goods provider and the road user. The theoretical model: a double-cost hidden level of effort. For accurate estimates, they found it important to include both user and provider concerns in determining the optimal level of decentralization. Using four different model specifications and three data sets, they find that 100-percent decentralization of maintenance functions (where there is no central regulation on quality standards) produces the most efficiency gains, as quality roads are provided at lower unit costs. There is little justification for central government to be involved in road maintenance. In fact, as Germany's example shows, uniform standards combined with decentralized maintenance remove the incentive to reduce costs and erode most of the efficiency gains from local maintenance. Maintenance is by definition a local activity and should reflect user preferences. Central governments should regulate safety and other network externalities by having a stake in the financing of road administration and in such functions as planning, policy setting, and regulation of safety and other network externalities. Central governments should finance no more than 10 percent of administrative costs. As for construction, it depends on the country. It may be better to ensure that contracting procedures in a country are efficient before suggesting the decentralized provision of roads. It is easier for local governments ...