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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 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.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2002/wp-cesifo-2002-05/cesifo_wp729.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 729.

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Date of creation: 2002
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Handle: RePEc:ces:ceswps:_729
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  1. Matthias Wrede, 2002. "Vertical externalities and control of politicians," Economics of Governance, Springer, vol. 3(2), pages 135-151, 07.
  2. Alesina, Alberto F & Angeloni, Ignazio & Etro, Federico, 2001. "The Political Economy of International Unions," CEPR Discussion Papers 3117, C.E.P.R. Discussion Papers.
  3. 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.
  4. John Ferejohn, 1986. "Incumbent performance and electoral control," Public Choice, Springer, vol. 50(1), pages 5-25, January.
  5. Persson, Torsten & Roland, Gerard & Tabellini, Guido, 1997. "Separation of Powers and Political Accountability," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1163-1202, November.
  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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