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Institutional Rules for Federations

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  • Alberto Alesina
  • Ignazio Angeloni
  • Federico Etro

Abstract

We study the organization of federations — or international unions — which decide together the provision of certain public goods. The benefit of centralization depends on the internalization of the spillovers, that of decentralization on the adaptability to local differences. We individuate as an optimal institutional design a form of fiscal federalism based on decentralization of expenditures and a system of subsidies and transfers between countries. Since this solution can be politically unfeasible, we study institutional compromises between a centralized federation and a decentralized one. “Flexible unions” and federal mandates in which both the state and federal levels are involved in providing public goods are typically superior to complete centralization and politically feasible. Finally, we study the effects of a qualified majority voting rule in a centralized system: we find that it can be a useful device to correct a bias toward “excessive” union level activism.

Suggested Citation

  • Alberto Alesina & Ignazio Angeloni & Federico Etro, 2001. "Institutional Rules for Federations," Harvard Institute of Economic Research Working Papers 1940, Harvard - Institute of Economic Research.
    • Handle: RePEc:fth:harver:1940
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    1. Attilio Gardini & Giuseppe Cavaliere & Luca Fanelli, 2005. "Risk Sharing, avversione al rischio e stabilizzazione delle economie regionali in Italia," Rivista di Politica Economica, SIPI Spa, vol. 95(3), pages 219-266, May-June.
    2. Alberto Alesina & Ignazio Angeloni & Ludger Schuknecht, 2005. "What does the European Union do?," Public Choice, Springer, vol. 123(3), pages 275-319, June.
    3. Alberto Alesina & Ignazio Angeloni & Federico Etro, 2005. "International Unions," American Economic Review, American Economic Association, vol. 95(3), pages 602-615, June.
    4. Alberto Alesina, 2002. "The Size of Countries: Does it Matter?," Harvard Institute of Economic Research Working Papers 1975, Harvard - Institute of Economic Research.
    5. Boggio, Margherita, 2011. "From Reluctant Privatization to Municipal Capitalism: an Overview on Ownership, Political Connections and Decentralization," MPRA Paper 46232, University Library of Munich, Germany.
    6. Robert Dur & Hein Roelfsema, 2005. "Why does centralisation fail to internalise policy externalities?," Public Choice, Springer, vol. 122(3), pages 395-416, March.
    7. Libman, Alexander Mikhailovich, 2009. "Эндогенные Границы И Распределение Власти В Федерациях И Международных Сообществах [ENDOGENOUS BOUNDARIES AND DISTRIBUTION OF POWER In the Federation]," MPRA Paper 16473, University Library of Munich, Germany.
    8. Giovanni Facchini & Cecilia Testa, 2009. "Who Is Against a Common Market?," Journal of the European Economic Association, MIT Press, vol. 7(5), pages 1068-1100, September.
    9. Islam, Roumeen, 2004. "What are the right institutions in a globalizing world? and... can we keep them if we have found them?," Policy Research Working Paper Series 3448, The World Bank.
    10. Eijffinger, Sylvester & Governatori, Matteo, 2004. "Fiscal and Monetary Interaction: The Role of Asymmetries of the Stability and Growth Pact in EMU," CEPR Discussion Papers 4647, C.E.P.R. Discussion Papers.
    11. Alesina, Alberto & Angeloni, Ignazio & Etro, Federico, 2001. "The Political Economy of International Unions," CEPR Discussion Papers 3117, C.E.P.R. Discussion Papers.
    12. Tsui, Kai-Yuen & Wang, Youqiang, 2008. "Decentralization with political trump: Vertical control, local accountability and regional disparities in China," China Economic Review, Elsevier, vol. 19(1), pages 18-31, March.
    13. Luciano Andreozzi & Roberto Tamborini, 2017. "Why is Europe engaged in an inter- dependence war, and how can it be stopped?," DEM Working Papers 2017/06, Department of Economics and Management.
    14. Bordignon, Massimo & Brusco, Sandro, 2006. "On enhanced cooperation," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 2063-2090, November.
    15. Charles Wyplosz, 2012. "Fiscal Rules: Theoretical Issues and Historical Experiences," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 495-525, National Bureau of Economic Research, Inc.
    16. Federico Etro, 2004. "The Political Economy of Fiscal and Monetary Unions," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 63(3-4), pages 289-328, December.
    17. Facchini, Giovanni, 2002. "Why Join a Common Market? The Political Economy of International Factor Mobility in a Multi-country Setting," Working Papers 02-0121, University of Illinois at Urbana-Champaign, College of Business.
    18. Matthias Wrede, 2004. "Small States, Large Unitary States and Federations," Public Choice, Springer, vol. 119(1_2), pages 219-240, April.
    19. Brandi, Clara & Wohlgemuth, Michael, 2006. "Strategies of Flexible Integration and Enlargement of the European Union: a Club-theoretical and Constitutional Economics Perspective," Freiburg Discussion Papers on Constitutional Economics 06/7, Walter Eucken Institut e.V..
    20. Irwin, Gregor & Penalver, Adrian & Salmon, Chris & Taylor, Ashley, 2008. "Dealing with country diversity: challenges for the IMF credit union model," Bank of England working papers 349, Bank of England.
    21. Joachim Ahrens & Martin Meurers, 2003. "EU eastern enlargement: Does the increasing heterogeneity of EU member states require more flexible EU institutions?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 56(19), pages 23-33, October.

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    More about this item

    JEL classification:

    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems

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