Abstract
This paper takes a political economy approach to fiscal centralisation through federation formation. We analyse a two-region model of federalism with inter-regional policy spillovers. Departing from a state of independence with decentralised provision of public policy, we analyse the proposed formation of a federation to internalise the spillovers. We consider equilibrium allocations under alternative institutional environments involving: simple majority voting, a restriction of uniform taxation, and regional bargaining through a bicameral legislature. Bicameralism facilitates federation formation for the largest set of parameter values of the model, which is consistent with the observation that bicameralism and federalism often appear together.
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