More optimistically: politicians generally care about being re-elected. Situations of corruption on a local level are more easily noticeable than those on national level, thus unless the political competition is zero, it's more likely that the guy will think about it twice. (I'm not making this stuff up - there's a good deal of models that have been created and tested on the matter).
Bureucracy: I'm not sure that it'd be much worse than today? I don't know how it works in the US, but here it's full of local offices that are set in place only to act as intermediaries with the central government. Moreoever, even in the worst possible scenario (that is, that the bureucracy costs were higher), the great majority of these costs would be without any doubt directed towards services useful to people living in the given region/city, rather than being aimed at the district that counts most in terms of national votes (which is what happens with centralized government - the district that weighs more, in electoral terms (so usually the most neutral), is guaranteed larger amounts of taxpayer money).