The Law and Economics of Federalism
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The Law and Economics of Federalism

Edited by Jonathan Klick

This unique volume takes a primarily empirical perspective on the law and economics of federalism. Using cross jurisdiction variation, the specially commissioned chapters examine the effects of various state experiments in areas such as crime, welfare, consumer protection, and a host of other areas. Although legal scholars have talked about states as laboratories for decades, rarely has the law and economics literature treated the topic of federalism empirically in such a systematic and useful way.
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Chapter 3: Lessons in fiscal federalism from American Indian nations

Terry L. Anderson and Dominic P. Parker


Since Native Americans were relegated to reservations in the nineteenth century, their governance structures have been dictated largely from Washington, leaving little room for an optimal mix of tribal, federal, and state control to evolve. This chapter explores the optimal mix with respect to law enforcement and natural resource management. The key advantages of decentralized tribal control lie with its conformity to local norms of legitimacy, and with its better incentives for maximizing returns from local resources. The key advantage of the larger nodes of government lies with scale economies in resource management and in the provision of a uniform rule of law. Based on these tradeoffs, we argue that some responsibilities are ill-suited for non-local control (e.g., jurisdiction over reservation crime) whereas others are well-suited (e.g., jurisdiction over commercial contracts involving non-Indians). We explain why local jurisdiction over contracts, and top-down control of natural resources by the federal government, can stunt economic development on reservations. We evaluate these arguments by reviewing empirical studies, and by analyzing a novel reservation-level panel data set spanning 1915–2010. The evidence from both sources suggests the current mix of governance authority – which has largely been imposed on tribes rather than chosen by them – has slowed income growth. We conclude that tribes should be free to choose a different system of federalism and we identify some potential barriers to a freer choice.

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