On the Endogenous Allocation of Decision Powers in Federal Structures

23 Pages Posted: 12 Sep 2005

See all articles by Oliver Lorz

Oliver Lorz

RWTH Aachen University

Gerald Willmann

Bielefeld University; IfW Kiel; KU Leuven; CESifo (Center for Economic Studies and Ifo Institute)

Abstract

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.

Keywords: Political economy, fiscal federalism, endogenous centralization, constitutional design

JEL Classification: H11, H41, H77

Suggested Citation

Lorz, Oliver and Willmann, Gerald, On the Endogenous Allocation of Decision Powers in Federal Structures. Journal of Urban Economics, Vol. 57, pp. 242-257, 2005, Available at SSRN: https://ssrn.com/abstract=530142

Oliver Lorz

RWTH Aachen University ( email )

Templergraben 55
D-52056 Aachen, 52056
Germany

Gerald Willmann (Contact Author)

Bielefeld University ( email )

Universit├Ątsstra├če 25
Bielefeld, NRW 33613
Germany

IfW Kiel ( email )

P.O. Box 4309
Kiel, Schleswig-Hosltein D-24100
Germany

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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