Location of Repository

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

By Sanjit Dhami


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

Topics: Insurance, Spillovers, Information, Raiding the commons, Uncertainty
Publisher: Dept. of Economics, University of Leicester
Year: 2005
OAI identifier: oai:lra.le.ac.uk:2381/4470

Suggested articles



  1. (2003). Centralized versus decentralized provision of local public goods: A political economy approach,” doi
  2. (1996). Channels of interstate risk sharing: United States doi
  3. (1998). Economic risk and political risk in fiscal unions” doi
  4. (1996). Federal fiscal constitutions: risk sharing and redistribution”, doi
  5. (1972). Fiscal federalism (Harcourt Brace Jovanovich:
  6. (1992). Fiscal federalism and optimum currency areas: evidence for Europe from the United States” doi
  7. (1999). Inter-regional insurance”, doi
  8. (1996). Optimal regional redistribution under asymmetric information” doi
  9. (2000). Political institutions: Explaining economic policy doi
  10. (1980). Redistributive taxation as social insurance” doi
  11. (1997). Rethinking Federalism”, doi
  12. (2002). Strategic Asset Allocation: Portfolio Choice for Long-Term Investors doi
  13. (1998). Tax competition and revelation of preferences for public expenditure” doi
  14. (1999). The provision of public services by government funded decentralized agencies”
  15. (2004). Towards a second generation theory of federalism”, doi
  16. Understanding the soft budget constraint” doi

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.