Transfers in a polarized country: bridging the gap between efficiency and stability |
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Authors: | Ori Haimanko Shlomo Weber |
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Institution: | a Department of Economics, Ben-Gurion University, Beer-Sheva, Israel b Université de Toulouse I, GREMAQ and IDEI, Toulouse, France c Department of Economics, Southern Methodist University, Dallas, TX 75275-0496, USA d CORE, Catholic University of Louvain, Belgium |
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Abstract: | We consider a political economy model of country whose citizens have heterogeneous preferences for a national policy and some regions may contemplate a threat of secession. The country is efficient if its breakup into smaller countries leads to an aggregate utility loss. We show that in an efficient country whose citizens' preferences exhibit a high degree of polarization, a threat of secession cannot be eliminated without inter-regional transfers. We also demonstrate that if majority voting is used to determine the redistribution schemes within the country, then a high degree of polarization yields the full-compensation scheme as the unique political equilibrium. |
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Keywords: | H20 D70 D73 |
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