Contractual Federalism and Strategy-proof Coordination

Antoine Loeper

Discussion Papers from Northwestern University, Center for Mathematical Studies in Economics and Management Science

Abstract: This paper takes a mechanism design approach to federalism and assumes that local preferences are the private information of local jurisdictions. Contractual federalism is defined as a strategy-proof contract among the members of the federation supervised by a benevolent but not omniscient federal authority. We show that even if the size of the information to be elicited is minimal, the incentive compatibility constraint has a bite in terms of flexibility and welfare. Strategy-proof and efficient federal mechanisms are necessarily uniform. There exists inefficient and non-uniform strategy-proof mechanisms, but they are socially worse than non cooperative decentralization. Federal mechanisms which are neutral and robust to coalition manipulations are equivalent to voting rules on uniform policies.

Keywords: Federalism; Asymmetric Information; Strategy-proofness; Externality; Coordination; Uniformity. JEL Classification Numbers: D71; D72; D82; H77 (search for similar items in EconPapers)
Date: 2008-12
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