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Small States, Large Unitary States and Federations

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  • Matthias Wrede

Abstract

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 ac-cording 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 dis-cusses the creation of unions. Making specific assumption on the distribution of prefer-ences, it analyzes strong Nash equilibria and coalition-proof equilibria at the union formation stage.

Suggested Citation

  • Matthias Wrede, 2002. "Small States, Large Unitary States and Federations," CESifo Working Paper Series 729, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_729
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    File URL: http://www.cesifo-group.de/DocDL/cesifo_wp729.pdf
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    References listed on IDEAS

    as
    1. Alesina, Alberto F & Angeloni, Ignazio & Etro, Federico, 2001. "The Political Economy of International Unions," CEPR Discussion Papers 3117, C.E.P.R. Discussion Papers.
    2. 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.
    3. 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.
    4. 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.
    5. John Ferejohn, 1986. "Incumbent performance and electoral control," Public Choice, Springer, vol. 50(1), pages 5-25, January.
    6. Matthias Wrede, 2002. "Vertical externalities and control of politicians," Economics of Governance, Springer, vol. 3(2), pages 135-151, July.
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    Citations

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    Cited by:

    1. Marco Alderighi & Christophe Feder, 2014. "Political competition, power allocation and welfare in unitary and federal systems," Working Paper series 23_14, Rimini Centre for Economic Analysis.
    2. Bordignon, Massimo & Brusco, Sandro, 2006. "On enhanced cooperation," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 2063-2090, November.
    3. Federico Etro, 2006. "Political geography," Public Choice, Springer, vol. 127(3), pages 321-343, June.
    4. 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.
    5. 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.
    6. Kersten Kellermann, 2008. "„Kosten der Kleinheit” und die Föderalismusdebatte in der Schweiz," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 9(2), pages 196-225, May.

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