Optimal Distribution Of Powers In A Federation: A Simple, Unified Framework

Sanjit Dhami

No 05/24, Discussion Papers in Economics from Division of Economics, School of Business, University of Leicester

Abstract: In a federation with n >= 2 regions the relative optimality of six regimes- autarky, centralization, unregulated devolution, regulated devolution, direct democracy, and revenue maximising leviathan, is examined. Public policy consists of redistribution and regional public good provision. Regional incomes are uncertain and correlated while estimates of the usefulness of regional public goods are uncertain; the federal government’s estimates are noisier relative to those of regional governments. The optimality of each regime is influenced by four margins- regional insurance, coarseness of federal information, internalisation of spillovers and ‘raiding the commons’. Regulated devolution is the only regime that is capable of producing the constrained first best level of public goods. Federal insurance under the two regimes of direct democracy and a federal leviathan, can be inadequate relative to that under a utilitarian federal government. An increase in the number of regions has important implications for insurance and raiding the commons. The median region’s choice of redistribution under direct democracy is influenced in important ways by the distribution of regional uncertainties. The paper synthesises a significant proportion of the existing literature in a single model and also provides several new results.

Keywords: Insurance; Spillovers; Information; Raiding the commons; Uncertainty (search for similar items in EconPapers)
JEL-codes: D78 H41 H77 (search for similar items in EconPapers)
Date: 2005-08
New Economics Papers: this item is included in nep-pbe and nep-pol
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Related works:
Journal Article: OPTIMAL DISTRIBUTION OF POWERS IN A FEDERATION: A SIMPLE, UNIFIED FRAMEWORK (2007)
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