Abstract
The Economic Theory of Federalism yields one clear and overriding result: a federal (i.e. decentralized) state is superior to a centralized one in the sense that it fulfils the demands of the citizens more effectively. A federal constitution that endowes the federal units (provinces, Länder, states, cantons or communes) with sufficient decision-making rights and taxing power has three major advantages over a unitary state: Advantage 1: More flexible politics. In all societies, citizens differ widely in their demand for services provided by the state. These differences in demand are not only the result of heterogeneous tastes due to differences in tradition, culture, language etc, but also of unequal economic conditions. The latter are caused by, for example, leads or lags in the general business cycle and, of course, special structural conditions such as differences in infrastructure, unemployment, the concentration of particular industries etc. These differences in the demand for public services must be met by differentiated supply policies if citizens’ preferences are to be fulfilled. Federal subunits are best able to meet this challenge. The politicians in charge are better endowed with information about the local requirements. They have the incentives to provide these services according to the preferences of the citizens because they are directly accountable for the local policy and their reelection depends on the satisfaction of the voters they represent1.
It could be argued that locally elected politicians in central states face also incentives to care for local preferences. However, in many countries, the members of the national parliament are only partly, or not at all, elected in local precincts. In the Federal Republic of Germany, for instance, a substantial share of the members of the Bundestag are not elected by winning in a particular precinct but beause they are placed on a list which is controlled by the party they belong to. Moreover, in national parliaments, a local delegates’ accountability is low as he is only one of several hundred parliamentarians.
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Frey, B.S., Eichenberger, R. (2001). Federalism with Overlapping Jurisdictions and Variable Levels of Integration: The Concept of FOCJ. In: von Hagen, J., Widgren, M. (eds) Regionalism in Europe. ZEI Studies in European Economics and Law, vol 4. Springer, Boston, MA. https://doi.org/10.1007/978-1-4615-1643-9_1
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