University of Chicago - Irving B. Harris Graduate School of Public Policy Studies; Higher School of Economics; Centre for Economic Policy Research (CEPR)
In a federal state with weak political institutions, constituent units might protect their enterprises from enforcement of federal taxes. The effectiveness of such protection depends on the ability of local politicians to extract rents from enterprises. They can do so when local monopolies can be effectively sustained and electoral competition is weak. To analyze effects of political decentralization in a country with powerful regional industries, we build a simple general-equilibrium model where local politicians' electoral positions are levels of competition in the regional market, heterogenous firms provide campaign finance and compete in the labor market, and voters care about their wages, but could be influenced by campaign spending.
Number of Pages in PDF File: 26
Keywords: Federalism, Positive Political Economics, Transition, Development
JEL Classification: P2, P3, H77
Date posted: June 1, 2003