Edited by Ehtisham Ahmad and Giorgio Brosio
Chapter 6: Asymmetric federalism: constitutional and fiscal exchange and the political economy of decentralization
This chapter attempts to explain in economic and political terms the emergence of decentralized governance in general and of asymmetric federalism in particular. It also explores some general implications of asymmetric authority for government finance, service levels, and intergovernmental competition. The chapter is not a survey, but rather provides an overview of how and why asymmetries arise. A broad range of theoretical and empirical work on federalism is based on the implicit assumption that subnational governments within federal systems are more or less equally sized, equally influential, and equally autonomous. The assumption of homogeneous local governments seems to be based on the intuition that the production and distribution of public services by local governments have properties similar to those of competitive firms. At a competitive Tiebout equilibrium, each government at a given level of governance in a federal system tends to be that which provides services to its residents at least cost. Only efficiently-sized communities survive in a fiscally competitive environment, because least-cost producers of government services always attract residents and tax base away from less optimally sized jurisdictions. Consequently, all jurisdictions that produce the same mix of government services should be approximately the same efficient size, and a federal system will be composed of more or less homogeneous local governments. The Tiebout model is a useful benchmark for analyzing a variety of locational decisions in which production economies and competition may be presumed to play a dominant role in the local governments that emerge.
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