Chapter 3: Modelling Vertical Competition
Albert Breton1 Introduction This chapter is aimed at modelling vertical competition, that is, at understanding a mechanism that helps determine equilibrium assignments of powers in federal states and in decentralized unitary states. A perusal of economic writings on decentralization and federalism – often labelled ‘fiscal federalism’ – makes it clear that, except for some applications of Charles Tiebout’s (1956) mobility model and for the yardstick competition model introduced in the literature by Pierre Salmon (1987a and 1987b), approaches to the subject have been essentially normative – indeed normative in a nominalist tradition. This is particularly the case regarding the problem of the assignment of powers which, from the earliest times, has been one of the central problems of decentralized and federalist arrangements. The normative character of economic writings is apparent in the fact that, except for the models just noted, the literature proposes no automatic mechanisms based on maximizing (or other) behaviours capable of generating equilibrium outcomes. Instead, the literature is replete with what we may call principles or norms which, it is claimed, would lead to more efficiency in political systems and to greater welfare for citizens. Among the principles that have been and continue to be bandied about, I note, to illustrate, the following: (a) powers should be assigned in such a way that the span of public goods – the number of persons to whom the benefits of a public good accrue or are made available in equal amount (see Breton and Scott 1978, Chapter 4 on the definition of spans)...
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