The optimal degree of decentralization depends on the importance of inter-state externalities of local policies. We show that inter-state externalities are determined by spatial distribution of interest groups within the country. Interest groups who have multi-state scope internalize inter-state externalities to a larger extent than the lobbyists with interests within a single state. We use variation in the geographic boundaries of politically-powerful industrial interests to estimate the effect of inter-state externalities on firm performance. Using firm-level panel data from a peripheralized federation, Russia in 1996-2003, we show that, controlling for firm fixed effects, the performance of firms substantially improves with an increase in the number of neighboring regions under influence of multi-regional business groups compared to the number influenced by local business groups. Our findings have implications for the literatures on federalism and on international trade as trade restrictions are a common source of inter-state externalities.
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Paper provided by Laboratory for Macroeconomic Analysis in its series Working Papers with number
WP13_2007_16.
Find related papers by JEL classification: P26 - Economic Systems - - Socialist Systems and Transition Economies - - - Political Economy D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy-Making and Implementation F15 - International Economics - - Trade - - - Economic Integration F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Irina Slinko & Evgeny Yakovlev & Ekaterina Zhuravskaya, 2003.
"Laws for Sale: Evidence from Russia,"
Working Papers
w0031, Center for Economic and Financial Research (CEFIR).
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