Handbook of Fiscal Federalism
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Handbook of Fiscal Federalism

Edited by Ehtisham Ahmad and Giorgio Brosio

This major Handbook addresses fiscal relations between different levels of government under the general rubric of ‘fiscal federalism’, providing a review of the latest literature as well as an invaluable guide for practitioners and policy makers seeking informed policy options. The contributors include leading lights in the field, many of whom have themselves made seminal contributions to the literature.
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Chapter 5: Asymmetric Federalism and the Political Economy of Decentralization

Roger D. Congleton


Roger D. Congleton Introduction 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 and equally influential. This idea 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. Consequently, all jurisdictions that produce the same mix of government services are approximately the same efficient size, and a federal system will be composed of more or less homogeneous local governments. 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. The Tiebout model is a useful characterization of many locational decisions in which production economies and competition may be presumed to play a significant part in the decisions reached. However, the assumption of uniform jurisdictional size and power is a less useful foundation for county, city and state levels of analysis. Here we observe significant differences in physical size, population, income and political representation for state and local governments. In the United States, California is physically the third-largest state with 11 per cent of the citizens, whereas Wyoming, the sixth-largest state includes less than 1 per cent of the US...

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