Bicameral Bargaining and Federation Formation

Abstract This paper takes a political economy approach to fiscal centralization, through federation formation. I analyze a simple two region model of federalism with interregional policy spillovers. Departing from a state of independence with decentral-ized provision of public policy we analyze the proposed formation of a federation to internalize the spillovers. A federation forms when the centralized outcomes satisfy participation constraints. With this restriction to rational federalism we then consider equilibrium allocations under alternative institutional environments involving; simple majority voting, restriction of uniform taxation, and regional bargaining through a bicameral legislature. The analysis illustrates the importance of these institutions on the allocation of policy authority in federations that form. The model produces clear results with regards to the feasible set of equilibrium centralization and the allocations of publicly provided goods therein