Working Paper

On the Endogenous Allocation of Decision Powers in Federal Structures

Authors

  • Oliver Lorz
  • Gerald Willmann
Publication Date

This paper provides a political-economy explanation of the degree of centralization in economic policy making. To determine which policies are to be centralized, regions select representatives who then negotiate the degree of centralization and the regional cost shares of centrally decided policies. We show that the resulting degree of centralization is suboptimally low. Voters strategically delegate to representatives who are averse to public spending and hence prefer decentralized decisions in order to reduce their region's cost share. When spill-overs are asymmetric, strategic delegation is stronger at the periphery than at the center.

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JEL Classification
H11, H41, H77

Key Words

  • Constitutional Design
  • Endogenous Centralization
  • Fiscal Federalism
  • Fiskalischer Föderalismus
  • political economy