This paper explores the relationship between federalism and individual liberty. It is shown that a complete treatment of the relationship between federalism and individual liberty should consider two countervailing effects. On the one hand, a federalist structure enhances individual liberty by enlarging the choice set of the citizens. On the other hand, however, a federalist system leads to institutional diversity, a fact that per se leads to higher exit costs, which a citizen must bear if he
or she decides to change jurisdictions. This effect on individual liberty is a negative one, since a consequence of every increase in the exit costs is a decrease of individual liberty. The optimum range of diversity of jurisdictions is shown to lie where the two effects counterbalance each other
