Fiscal federalism theory has begun to endogenize the insights of modern organizational economics, especially those of agency and transaction-cost approaches. We follow the lead by endogenizing knowledge-based theories too. We show how the theoretical forerunners of local public finance recognized, if in different degrees, the knowledge perspective. We stress that the distribution of dispersed knowledge is the unknown rather than the given variable. Whence our central conclusion: knowledge coordination is generally more important than incentive or transaction-cost coordination. This conclusion yields new implications about the vertical organization
of the public sector – hence about welfare. Our concrete illustration is supranational federalism
