Public Goods in Federal Systems

Abstract

We study a political-economic model of federations with both federal and supplemental regional provision of a local (impure) public good with spillover effects. Regional differences in average income levels and externalities of provision induce differences in preferences over federal and regional levels of provision. Although the voters’ preferences are not single-peaked, we provide sufficient conditions for the existence of voting equilibria and characterize their properties under alternative federal institutional arrangements. We show that, under different conditions on parameters, the voting equilibria display markedly different patterns of federal vs. local provision, relying on different political coalitions for their support. We show that the inter-regional redistributive tensions present in federations lead to differences in regional support for different degrees of fiscal (de-)centralization: federation, confederation, and complete centralization. The present paper analyzes the political and economic incentives within federal structures with public good provision on both local and federal levels and spillover effects between regions — features that often characterize contemporary federal systems. Although such systems rarely have institutional provisions that explicitly authorize the duplication of services or public goods on the federal and the local levels, in practice, public goods provided at the two levels of government are often de facto substitutes, with fiscal federalism emerging less as a constitutional and juridical reality and more as a dynamic economic one. Sometimes the substitution effect is immediate and direct,