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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 Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 208.

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Date of creation: 2003
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Publication status: Published in Journal of Public Economics, vol. 89, n°7, juillet 2005, p. 1277-1303.
Handle: RePEc:ide:wpaper:568
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  1. Weber, S., 1989. "On Hierarchical Spatial Competition," Papers 89-04, York (Canada) - Department of Economics.
  2. Haimanko, Ori & Le Breton, Michel & Weber, Shlomo, 2004. "Voluntary formation of communities for the provision of public projects," Journal of Economic Theory, Elsevier, vol. 115(1), pages 1-34, March.
  3. 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.
  4. Greenberg, Joseph & Weber, Shlomo, 1986. "Strong tiebout equilibrium under restricted preferences domain," Journal of Economic Theory, Elsevier, vol. 38(1), pages 101-117, February.
  5. Alberto Alesina & Enrico Spolaore, 1995. "On the Number and Size of Nations," NBER Working Papers 5050, National Bureau of Economic Research, Inc.
  6. Caplin, Andrew & Nalebuff, Barry, 1991. "Aggregation and Social Choice: A Mean Voter Theorem," Econometrica, Econometric Society, vol. 59(1), pages 1-23, January.
  7. Baqir, Reza & Easterly, William & Alesina, Alberto, 1999. "Public Goods and Ethnic Divisions," Scholarly Articles 4551797, Harvard University Department of Economics.
  8. 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.
  9. Alberto Alesina & Enrico Spolaore & Romain Wacziarg, 1997. "Economic Integration and Political Disintegration," NBER Working Papers 6163, National Bureau of Economic Research, Inc.
  10. Philippe Jehiel & Suzanne Scotchmer, 2001. "Constitutional Rules of Exclusion in Jurisdiction Formation," Review of Economic Studies, Oxford University Press, vol. 68(2), pages 393-413.
  11. Michel Le Breton & Shlomo Weber, 2003. "The Art of Making Everybody Happy: How to Prevent a Secession," IMF Staff Papers, Palgrave Macmillan, vol. 50(3), pages 4.
  12. Guesnerie Roger & Oddou Claude, 1979. "Second best taxation as a game," CEPREMAP Working Papers (Couverture Orange) 7919, CEPREMAP.
  13. Torsten Persson & Guido Tabellini, 1999. "Political Economics and Public Finance," NBER Working Papers 7097, National Bureau of Economic Research, Inc.
  14. Bagnoli, M. & Bergstrom, T., 1989. "Log-Concave Probability And Its Applications," Papers 89-23, Michigan - Center for Research on Economic & Social Theory.
  15. Nir Dagan & Oscar Volij, 1995. "Formation of Nations in a Welfare State Minded World," Economic theory and game theory 010, Nir Dagan, revised Aug 1999.
  16. Bordignon, Massimo & Brusco, Sandro, 1999. "Optimal secession rules," ZEW Discussion Papers 99-51, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  17. Alberto Alesina & Reza Baqir & William Easterly, 1999. "Public Goods and Ethnic Divisions," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1243-1284.
  18. Esteban, J. & Ray, D., 1993. "On the Measurement of Polarization," UFAE and IAE Working Papers 221.93, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  19. Casella, Alessandra, 1992. "On Markets and Clubs: Economic and Political Integration of Regions with Unequal Productivity," American Economic Review, American Economic Association, vol. 82(2), pages 115-21, May.
  20. Shlomo Weber, 1992. "On Hierarchical Spatial Competition," Review of Economic Studies, Oxford University Press, vol. 59(2), pages 407-425.
  21. Feinstein, Jonathan S, 1992. "Public-Good Provision and Political Stability in Europe," American Economic Review, American Economic Association, vol. 82(2), pages 323-29, May.
  22. Carlo Perroni & Kimberley A. Scharf, . "Tiebout with Politics: Capital Tax Competition and Constitutional Choices," EPRU Working Paper Series 97-05, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  23. Le Breton, Michel & Weber, Shlomo, 2003. "The Art of Making Everybody Happy : How to Prevent a Secession," IDEI Working Papers 164, Institut d'Économie Industrielle (IDEI), Toulouse.
  24. Buchanan, James M & Faith, Roger L, 1987. "Secession and the Limits of Taxation: Toward a Theory of Internal Exit," American Economic Review, American Economic Association, vol. 77(5), pages 1023-31, December.
  25. Wooders, Myrna, 1978. "Equilibria, the core, and jurisdiction structures in economies with a local public good," Journal of Economic Theory, Elsevier, vol. 18(2), pages 328-348, August.
  26. 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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