Federalism and optimal allocation across levels of governance

In: Discussion papers SP II 2010-09

In: Forschungsprofessur & Projekt "The Future of Fiscal Federalism"

Abstract

Countries differ in their governmental architectures and in the rules that describe the allocation of tasks, rights and duties across the various levels of government. In this paper, we present a short and selective survey of the development of the theory of optimal allocation of rights and duties along the vertical dimension in federations. We thereby first discuss the multiple trade-offs brought forward in the literature; these make that an ideal allocation of actual tasks across levels of government may be difficult, if not impossible, to attain. Then we turn to the consequences of a sub-optimal allocation of tasks and discuss spillover effects, strategic interactions between jurisdictions and intergovernmental competition. Throughout the review, we highlight paths in need of further research such that, in time, we will have a more solid ground for policy advice.