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Federations, Constitutions, and Political Bargaining

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Abstract

The paper studies a world where a region provides essential inputs for the successful implementation of a local public policy project with spill-overs, and where bargaining between different levels of government may ensure efficient decision making ex post. We ask whether the authority over the public policy measure should rest with the local government or be centralized, allowing financial relationships within the federation to be designed optimally. We show that centralization is always dominant when governments are benevolent, and that both governance structures are otherwise inefficient as long as political bargaining is disregarded. With bargaining, however, the first best can often be achieved under decentralization, but not under centralization. At the root of the result is the alignment of decision making over both essential inputs and final project size under decentralization.

Suggested Citation

  • Anke S. Kessler & Christoph Luelfesmann & Gordon M. Myers, 2007. "Federations, Constitutions, and Political Bargaining," Discussion Papers dp07-19, Department of Economics, Simon Fraser University.
  • Handle: RePEc:sfu:sfudps:dp07-19
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    File URL: http://www.sfu.ca/econ-research/RePEc/sfu/sfudps/dp07-19.pdf
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    Cited by:

    1. Federico Etro, 2006. "Political geography," Public Choice, Springer, vol. 127(3), pages 321-343, June.
    2. Petra Ens, 2009. "Tax competition and equalization: the impact of voluntary cooperation on the efficiency goal," Working Papers 2009/16, Institut d'Economia de Barcelona (IEB).
    3. Anke S. Kessler, 2014. "Communication in Federal Politics: Universalism, Policy Uniformity, and the Optimal Allocation of Fiscal Authority," Journal of Political Economy, University of Chicago Press, vol. 122(4), pages 766-805.

    More about this item

    Keywords

    Federalism; Constitutions; Decentralization; Grants; Political Bargaining.;

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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