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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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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2002018.

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Date of creation: 00 Apr 2002
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Handle: RePEc:cor:louvco:2002018
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  2. Cremer, Helmuth & De Kerchove, Anne-Marie & Thisse, Jacques-Francois, 1985. "An economic theory of public facilities in space," Mathematical Social Sciences, Elsevier, vol. 9(3), pages 249-262, June.
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  8. Persson, Torsten & Tabellini, Guido, 1999. "Political Economics and Public Finance," CEPR Discussion Papers 2235, C.E.P.R. Discussion Papers.
  9. Nir Dagan & Oscar Volij, 1995. "Formation of Nations in a Welfare State Minded World," Economic theory and game theory 002, Oscar Volij, revised Aug 1999.
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  13. Guesnerie Roger & Oddou Claude, 1979. "Second best taxation as a game," CEPREMAP Working Papers (Couverture Orange) 7919, CEPREMAP.
  14. Haimanko, Ori & Le Breton, Michel & Weber, Shlomo, 2003. "Voluntary Formation of Communities for the Provision of Public Projects," IDEI Working Papers 169, Institut d'Économie Industrielle (IDEI), Toulouse.
  15. Weber, Shlomo & Zamir, Shmuel, 1985. "Proportional taxation: Nonexistence of stable structures in an economy with a public good," Journal of Economic Theory, Elsevier, vol. 35(1), pages 178-185, February.
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  17. Joan-Maria Esteban & Debraj Ray, 1991. "On the Measurement of Polarization," Boston University - Institute for Economic Development 18, Boston University, Institute for Economic Development.
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  19. Wang, You-Qiang & Tsui, Kai-Yuen, 2000. " Polarization Orderings and New Classes of Polarization Indices," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 2(3), pages 349-63.
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