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The architecture of federations: Constitutions, bargaining, and moral hazard

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  • Luelfesmann, Christoph
  • Kessler, Anke
  • Myers, Gordon M.

Abstract

The paper studies a federal system where (a) a region provides non-contractible inputs into the social benefits from a public policy project with spillovers to other regions, and (b) where political bargaining between different levels of government may ensure efficient decision making ex post. Allowing intergovernmental grants to be designed optimally, we ask whether project authority should rest with the region or with the central government. Centralization is shown to dominate when governments are benevolent. With regionally biased governments, both centralization and decentralization yield inefficiencies and the second-best institution depends on parameter values if political bargaining is prohibited. When bargaining is feasible, however, the first best can often be achieved under decentralization, but not under centralization. At the root of this dichotomy is the alignment of decision making over essential inputs and project size under decentralized governance, and their misalignment under centralization.

Suggested Citation

  • Luelfesmann, Christoph & Kessler, Anke & Myers, Gordon M., 2015. "The architecture of federations: Constitutions, bargaining, and moral hazard," Journal of Public Economics, Elsevier, vol. 124(C), pages 18-29.
  • Handle: RePEc:eee:pubeco:v:124:y:2015:i:c:p:18-29
    DOI: 10.1016/j.jpubeco.2014.11.009
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    Cited by:

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    2. Fidrmuc, Jan, 2015. "Political economy of fiscal unions," European Journal of Political Economy, Elsevier, vol. 40(PA), pages 147-157.
    3. Toke S. Aidt & Jayasri Dutta, 2017. "Fiscal Federalism and Electoral Accountability," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 19(1), pages 38-58, February.
    4. Kovaleva, Margarita Shagenovna (Ковалева, Маргарита Шагеновна), 2019. "Evolution Of Theoretical Bases And Principles Of Federalism [Эволюция Теоретических Основ И Принципов Федерализма]," State and Municipal Management Scholar Notes, Russian Presidential Academy of National Economy and Public Administration, vol. 3, pages 276-281.
    5. Noriaki Matsushima & Ryusuke Shinohara, 2015. "The efficiency of monopolistic provision of public goods through simultaneous bilateral bargaining," ISER Discussion Paper 0948, Institute of Social and Economic Research, Osaka University.
    6. Robin Boadway & Katherine Cuff, 2017. "The impressive contribution of Canadian economists to fiscal federalism theory and policy," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(5), pages 1348-1380, December.
    7. Gianmarco Daniele & Amedeo Piolatto & Willem Sas, 2020. "Does the Winner Take It All? Redistributive Policies and Political Extremism," Working Papers 1157, Barcelona Graduate School of Economics.
    8. Toke S. Aidt & Jayasri Dutta, 2017. "Fiscal Federalism and Electoral Accountability," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 19(1), pages 38-58, February.
    9. Alderighi, Marco & Feder, Christophe, 2020. "Institutional design, political competition and spillovers," Regional Science and Urban Economics, Elsevier, vol. 81(C).
    10. Etienne Farvaque & Florence Huart, 2017. "A policymaker’s guide to a Euro area stabilization fund," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 34(1), pages 11-30, April.
    11. Jenny Simon & Justin Mattias Valasek, 2017. "Centralized Fiscal Spending by Supranational Unions," Economica, London School of Economics and Political Science, vol. 84(333), pages 78-103, January.
    12. Che, Jiahua & Chung, Kim-Sau & Lu, Yang K., 2017. "Decentralization and political career concerns," Journal of Public Economics, Elsevier, vol. 145(C), pages 201-210.
    13. Haufler, Andreas, 2021. "Regulatory and bailout decisions in a banking union," Journal of Banking & Finance, Elsevier, vol. 133(C).

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    More about this item

    Keywords

    Federalism; Constitutions; Decentralization; Grants; Political bargaining;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H - Public Economics

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