The architecture of federations: Constitutions, bargaining, and moral hazard

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

Journal of Public Economics, 2015, vol. 124, issue C, 18-29

Abstract: The paper studies a federal system where (a) a region provides non-contractible inputs into the social benefits from a public policy project with spillovers to other regions, and (b) where political bargaining between different levels of government may ensure efficient decision making ex post. Allowing intergovernmental grants to be designed optimally, we ask whether project authority should rest with the region or with the central government. Centralization is shown to dominate when governments are benevolent. With regionally biased governments, both centralization and decentralization yield inefficiencies and the second-best institution depends on parameter values if political bargaining is prohibited. When bargaining is feasible, however, the first best can often be achieved under decentralization, but not under centralization. At the root of this dichotomy is the alignment of decision making over essential inputs and project size under decentralized governance, and their misalignment under centralization.

Keywords: Federalism; Constitutions; Decentralization; Grants; Political bargaining (search for similar items in EconPapers)
JEL-codes: D23 D78 H H21 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Related works:
Working Paper: The Architecture of Federations: Constitutions, Bargaining, and Moral Hazard (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:124:y:2015:i:c:p:18-29

DOI: 10.1016/j.jpubeco.2014.11.009

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