Polycentrism, Federalism, and Liberty: A Comparative Systems Perspective

Abstract

Federalism is commonly thought to be a pro-liberty system of government, in contrast to a unitary system. Within a unitary system, people face but a single government that taxes and regulates. Within federal systems, however, people face two or more governments that tax and regulate. In light of this multiplicity of independent governments, it is reasonable to wonder why federalism is widely thought to be favorable to liberty. Whether federalism is or is not favorable to liberty depends on some institutional features of a federalist system. In particular, we distinguish between two systems of federalist governance: competitive federalism and cartel federalism. Where competitive federalism entails competition among all units of government, cartel federalism entails collusion among governments. Competitive federalism has a polycentric structure where no single government dominates the other governments. In contrast, cartel federalism has a monocentric structure that is dominated by the cartelizing unit of government.

Keywords: Polycentricity; Competitive federalism; Cartel federalism; Decentralization; Political externalities

JEL Classification: A12; D7; H2; H77