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The Art of Making Everybody Happy; How to Prevent a Secession

Listed author(s):
  • Michel Le Breton
  • Shlomo Weber

In this paper we consider a model of the country with heterogeneous population and examine compensation schemes that may prevent a threat of secession by dissatisfied regions. We show that horizontal imbalances are combatable with secession-proof compensation schemes that entail a degree of partial equalization: the disadvantageous regions should be subsidized but the burden on advantageous regions should not be too excessive. In the case of uniform distribution, we establish the 50-percent compensation rule for disadvantageous regions. Thus, we argue for a limited gap reduction between advantageous and disadvantageous regions and show that neither laissez faire nor Rawlsian allocation is secession-proof.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/176.

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Length: 36
Date of creation: 01 Nov 2001
Handle: RePEc:imf:imfwpa:01/176
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