The Architecture of Federations: Constitutions, Bargaining, and Moral Hazard

49 Pages Posted: 7 Apr 2009

See all articles by Anke S. Kessler

Anke S. Kessler

Simon Fraser University (SFU) - Department of Economics; University of Bonn - Economic Science Area; Centre for Economic Policy Research (CEPR)

Christoph Lülfesmann

University of Bonn - Economic Science Area; Simon Fraser University (SFU) - Department of Economics

Gordon M. Myers

Simon Fraser University (SFU) - Department of Economics

Date Written: March 2009

Abstract

The paper studies a federal system where a region provides non-contractible essential inputs for the successful implementation of a local public policy project with spill-overs, and where bargaining between different levels of government may ensure efficient decision making ex post. We ask whether the authority over the public policy measure should rest with the local government or with the central government, allowing financial relationships within the federation to be designed optimally. Centralization is shown to dominate when governments are benevolent. With regionally biased governments, both centralization and decentralization are suboptimal as long as political bargaining does not take place. With bargaining, however, the first best can often be achieved under decentralization, but not under centralization. At the root of this result is the alignment of decision making over essential inputs and project size under decentralized governance.

Keywords: Constitutions, Decentralization, Federalism, Grants, Political Bargaining

JEL Classification: D23, D78, H21, H77

Suggested Citation

Kessler, Anke S. and Lülfesmann, Christoph and Myers, Gordon M., The Architecture of Federations: Constitutions, Bargaining, and Moral Hazard (March 2009). CEPR Discussion Paper No. DP7244. Available at SSRN: https://ssrn.com/abstract=1372564

Anke S. Kessler (Contact Author)

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada
604-291-3443 (Phone)
604-291-5944 (Fax)

University of Bonn - Economic Science Area ( email )

Adenauerallee 24-42
D-53113 Bonn
Germany
+49 228 739 246 (Phone)
+49 228 739 221 (Fax)

HOME PAGE: http://www.wipol.uni-bonn.de/~kessler/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Christoph Lülfesmann

University of Bonn - Economic Science Area ( email )

Adenauerallee 24-42
D-53113 Bonn
Germany
+49 228 737 939 (Phone)
+49 228 739 239 (Fax)

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

Gordon M. Myers

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada
604-291-3409 (Phone)

HOME PAGE: www.sfu.ca/~gmmyers

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