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Small States, Large Unitary States and Federations

  • Matthias Wrede


Employing a political-economics approach, this paper compares small states and unions when the former fail to internalize cross-border externalities of publicly provided goods. It discusses two types of unions: federations with more than one level of government and unitary states. While unitary states are unable to differentiate public spending according to differing preferences, rents of governments in a federation are higher due to a common-pool problem. The comparison leads to the following results. (1) Citizens prefer small states to large states if spillover effects are weak. (2) They benefit from a multi-level government only if their preferences heavily differ from the median-voter's preferences and if spillovers are strong. Based on this comparison the paper also discusses the creation of unions. Making specific assumption on the distribution of preferences, it analyzes strong Nash equilibria at the union formation stage.

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Article provided by Springer in its journal Public Choice.

Volume (Year): 119 (2004)
Issue (Month): 1_2 (04)
Pages: 219-240

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Handle: RePEc:kap:pubcho:v:119:y:2004:i:1_2:p:219-240
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  1. Bernheim, B. Douglas & Peleg, Bezalel & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria I. Concepts," Journal of Economic Theory, Elsevier, vol. 42(1), pages 1-12, June.
  2. John Ferejohn, 1986. "Incumbent performance and electoral control," Public Choice, Springer, vol. 50(1), pages 5-25, January.
  3. Matthias Wrede, 2002. "Vertical externalities and control of politicians," Economics of Governance, Springer, vol. 3(2), pages 135-151, 07.
  4. Alesina, Alberto F & Angeloni, Ignazio & Etro, Federico, 2001. "The Political Economy of International Unions," CEPR Discussion Papers 3117, C.E.P.R. Discussion Papers.
  5. Torsten Persson & Gérard Roland & Guido Tabellini, 1997. "Separation of Powers and Political Accountability," The Quarterly Journal of Economics, Oxford University Press, vol. 112(4), pages 1163-1202.
  6. Bernheim, B. Douglas & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria II. Applications," Journal of Economic Theory, Elsevier, vol. 42(1), pages 13-29, June.
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