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Kiel Institute for World Economics Kiel Working Papers, Kiel Institute for World Economics

No 1209:
On the Endogenous Allocation of Decision Powers in Federal Structures

Oliver Lorz and Gerald Willmann

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; (follow links to similar papers)

JEL-Codes: H11,; H41,; H77; (follow links to similar papers)

22 pages, April 2004

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