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Transfers in a polarized country: bridging the gap between efficiency and stability

  • Haimanko, Ori
  • Le Breton, Michel
  • Weber, Shlomo

We consider a political economy model of country whose citizens have heterogeneous preferences for a national policy and some regions may contemplate a threat of secession. The country is efficient if its break-up into smaller countries leads to aggregate utility loss. We show that in an efficient country whose citizens' preferences exhibit a high degree of polarization, a threat of secession cannot be eliminated without interregional transfers. We also demonstrate that, if majority voting is used to determine the redistribution schemes within the country, then a high degree of polarization yields the full compensation scheme as the unique political equilibrium.

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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 89 (2005)
Issue (Month): 7 (July)
Pages: 1277-1303

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Handle: RePEc:eee:pubeco:v:89:y:2005:i:7:p:1277-1303
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