Contractual Federalism and Strategy-proof Coordination

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.Federalism, Asymmetric Information, Strategy-proofness, Externality, Coordination, Uniformity. JEL Classification Numbers: D71, D72, D82, H77

Contractual federalism and strategy-proof coordination

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

Cross-border externalities and cooperation among representatives democracies

This paper analyzes the provision of public goods with cross-border externalities by representative democracies. The level of provision of each country is decided by a policy maker elected by majority rule at the country level. We compare the case in which policy makers set their policies noncooperatively with the case in which they set their policies through Coasian cooperation. Cooperation induces policy makers to internalize cross-border externalities, but it also induces strategic voters to elect a policy maker who cares less about the public good to reduce their public good contribution. The former effect increases public good provision while the latter reduces it. We show that once voters' incentives are taken into account, whether cooperation is beneficial depends neither on voters' preferences, nor on the magnitude of spillovers, nor on the size, bargaining power, or efficiency of each country. Instead, it depends only on the curvature of the demand for the public good: cooperation increases (decreases) public good provision when the demand function is more (less) convex than the unit elastic demand function. Hence, the desirability of international cooperation depends mostly on the type of public good considered

Coordination in heterogeneous federal systems

We compare centralized and decentralized policy making in a federation in which policy heterogeneity is inherently costly and preferences vary across jurisdictions: all jurisdictions agree that some harmonization is desirable but no one agrees on the direction of harmonization. This type of collective choice problem arises when members of a federal system have to coordinate nonbudgetary policies such as laws, regulations, standards, or diplomatic policies. Contrary to the common wisdom, decentralization becomes optimal when coordination becomes very important. When coordination costs are symmetric, decentralization dominates centralization irrespective of the magnitude of externalities and the heterogeneity of preferences. In the case of discontinuous network effects, standardization never Pareto dominates decentralizationPublicad

Federal Directives, Local Discretion and the Majority Rule

We consider a federation in which citizens determine by federal majority rule a discretionary policy space which partially restricts the sovereignty of member states. Citizens first vote on the size of the discretionary space (the degree of local discretion), and then on its location on the policy space (the federal directive). Finally, each state votes on its respective policy within the discretionary space. This federal mechanism allows voters to express directly their trade-o¤ between flexibility and policy harmonization. We show that at the voting equilibrium, the federal directive is negatively sensitive to the preferences of nonmedian voters. Moreover, the degree of local discretion is too limited and insufficiently sensitive to the magnitude of externalities. Hence, the model shows that inadequate and excessively rigid federal interventions can emerge from a neutral and democratic decision process without agency costs or informational imperfections.Federalism, Local Discretion, Directive, Partial Decentralization, Majority rule. JEL Classification Numbers: H77, D72

Dynamic pivotal politics

We analyze a dynamic extension of a parsimonious model of lawmaking in which preferences evolve over time and today’s policy becomes tomorrow’s status quo. Unlike in existing models of pivotal politics, policy makers’ voting behavior depends on the institutional environment and on their expectations about future economic and political shocks. Relative to sincere voting, the equilibrium behavior exhibits a strategic polarization effect, which increases with the degree of consensus required by the institution, the volatility of the policy environment, and the expected ideological polarization of the future policy makers. The equilibrium behavior also exhibits a strategic policy bias, which works against any exogenous policy bias embedded in the voting rule. Our analysis implies that the existing literature underestimates the inertial effect of checks and balances and overestimates the impact of institutional biases such as fiscally conservative budget procedures.Loeper gratefully acknowledges support from the Ministerio Economía y Competitividad (Spain), Grants No. RYC-2015-18326, No. ECO 2013-42710-P, No. MDM 2014-0431, and Comunidad de Madrid, MadEco-CM (S2015/HUM-3444

Dynamic collective choice with endogenous status quo

We analyze a bargaining situation in which preferences evolve over time and the previous agreement becomes the next status quo. The endogeneity of the status quo exacerbates the players' conflict of interest: Players disagree more often than under exogenous status quo. This leads to inefficiencies and status quo inertia. Under certain conditions, the negotiations can come to a complete gridlock: Players never reach an agreement. Gridlock can occur between players with arbitrarily similar preferences, provided they are sufficiently patient. In legislative settings, our model predicts polarization and explains why legislators may fail to react promptly to economic shocks.Loeper acknowledges the financial support from the Ministerio Economía y Competitividad (Spain), grants ECO-2013-42710-P, MDM-2014-0431, and Comunidad de Madrid, MadEco CM (S2015/HUM3444)

Federal directives, local discretion and the majority rule

We consider a federation in which citizens determine by federal majority rule a discretionary policy space which partially restricts the sovereignty of member states. Citizens first vote on the size of the discretionary space (the degree of local discretion), and then on its location on the policy space (the federal directive). Finally, each state votes on its respective policy within the discretionary space. This federal mechanism allows voters to express directly their trade-off between flexibility and policy harmonization. We show that at the voting equilibrium, the federal directive is negatively sensitive to the preferences of nonmedian voters. Moreover, the degree of local discretion is too limited and insufficiently sensitive to the magnitude of externalities. Hence, the model shows that inadequate and excessively rigid federal interventions can emerge from a neutral and democratic decision process without agency costs or informational imperfections

Gridlock and inefficient policy instruments

Why do rational politicians choose inefficient policy instruments? Environmental regulation, for example, often takes the form of technology standards and quotas even when cost-effective Pigou taxes are available. To shed light on this puzzle, we present a stochastic game with multiple legislative veto players and show that inefficient policy instruments are politically easier to repeal than efficient instruments. Anticipating this, heterogeneous legislators agree more readily on an inefficient policy instrument. We describe when inefficient instruments are likely to be chosen, and predict that they are used more frequently in (moderately) polarized political environments and in volatile economic environments. We show conditions under which players strictly benefit from the availability of the inefficient instrument.Harstad’s part of the research received funding from the European Research Council (ERC) under the European Union’s Horizon 2020 Research and Innovation Program (Grant 683031). Antoine Loeper gratefully acknowledges the support of the Fundación Ramón Areces, of the Ministerio de Economía y Competitividad (Spain), grants RYC-2015-18326, ECO 2016-75992-P, and MDM 2014-0431, and of the Comunidad de Madrid, grant MadEco-CM (S2015/HUM-3444)

Gridlock and inefficient policy instruments

Why do rational politicians choose inefficient policy instruments? Environmental regulation, for example, often takes the form of technology standards and quotas even when cost-effective Pigou taxes are available. To shed light on this puzzle, we present a stochastic game with multiple legislative veto players and show that inefficient policy instruments are politically easier than efficient instruments to repeal. Anticipating this, heterogeneous legislators agree more readily on an inefficient policy instrument. We describe when inefficient instruments are likely to be chosen, and predict that they are used more frequently in (moderately) polarized political environments and in volatile economic environments. We show conditions under which players strictly benefit from the availability of the inefficient instrument