The Architecture of Federations: Constitutions, Bargaining, and Moral Hazard

Gordon Myers, Anke Kessler and Christoph Luelfesmann
Authors registered in the RePEc Author Service: Christoph Lülfesmann

No 7244, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The paper studies a federal system where a region provides non-contractible 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 with the central government, allowing financial relationships within the federation to be designed optimally. Centralization is shown to dominate when governments are benevolent. With regionally biased governments, both centralization and decentralization are suboptimal as long as political bargaining does not take place. With bargaining, however, the first best can often be achieved under decentralization, but not under centralization. At the root of this result is the alignment of decision making over essential inputs and project size under decentralized governance.

Keywords: Constitutions; Decentralization; Federalism; Grants; Political bargaining (search for similar items in EconPapers)
JEL-codes: D23 D78 H21 H77 (search for similar items in EconPapers)
Date: 2009-03
New Economics Papers: this item is included in nep-cdm, nep-cta, nep-pbe and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Journal Article: The architecture of federations: Constitutions, bargaining, and moral hazard (2015)
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