Small States, Large Unitary States and Federations

In: Public choice, Band 119, Heft 1-2, S. 219-240

Abstract

Employing a political-economics approach, this paper compares small states & unions when the former fail to internalize cross-border externalities of publicly provided goods. It discusses two types of unions: federations with more than one level of government & unitary states. While unitary states are unable to differentiate public spending according to differing preferences, rents of governments in a federation are higher due to a common-pool problem. The comparison leads to the following results. (1) Citizens prefer small states to large states if spillover effects are weak. (2) They benefit from a multi-level government only if their preferences heavily differ from the median-voter's preferences & if spillovers are strong. Based on this comparison the paper also discusses the creation of unions. Making specific assumption on the distribution of preferences, it analyzes strong Nash equilibria at the union-formation stage. 2 Figures, 1 Appendix, 12 References. Adapted from the source document.