This article explains why decentralization can undermine accountability and answers three questions: what determines if power should be centralized or decentralized when regions are heterogeneous? How many levels of government should there be? How should state borders be drawn? We develop a model of political agency in which voters differ in their ability to monitor rent-seeking politicians. We find that rent extraction is a decreasing and convex function of the share of informed voters, because voter information improves monitoring but also reduces the appeal of holding office. As a result, information heterogeneity pushes toward centralization to reduce rent extraction. Taste heterogeneity pulls instead toward decentralization to match local preferences. Our model thus implies that optimal borders should cluster by tastes but ensure diversity of information. We also find economies of scope in accountability that explain why multiplying government tiers harms efficiency. A single government in charge of many policies has better incentives than many special-purpose governments splitting its budget and responsibilities. Hence, a federal system is desirable only if information varies enough across regions.

Boffa acknowledges financial support from the Free University of Bolzano (WW82); Piolatto from the Spanish Ministry of Science and Innovation (ECO-2012-37131) and the Government of Catalonia (2014-SGR-420); Ponzetto from the Spanish Ministry of Science and Innovation (JCI-2010-08414 and ECO-2011-25624), the Spanish Ministry of Economy and Competitiveness (RYC-2013-13838), the Government of Catalonia (2009-SGR-1157 and 2014-SGR-830), the Barcelona GSE and the BBVA Foundation through its first grant for Researchers, Innovators and Cultural Creators.