Federal Policy Elections, Local Politics

This paper analyzes voting over the provision of local public goods in a feder-ation with two fiscal tiers. The total level of provision is determined by popular demand in a two-stage vote: the federal vote is first and second, districts vote for locally-financed supplemental provision. Districts are heterogeneous only with respect to income distribution, which yields heterogeneity of per-capita tax bases across districts. Vertical tax-price comparisons determine public financing prefer-ences, which form fisrt-stage (federal) voting strategies. The paper shows that, in equilibrium, the decisive voter in the federal election is a relatively rich individual in a relatively poor district. The opportunity for decentralized public provision acts to check the size of the federal government in equilibrium, an effect that is amplified as district income distributions become more heterogeneous. A further result shows that a federal institution is welfare-enhancing from a centralized institution for a strong majority of voters, which implies a political economy rationalization for the protection of sub-national autonomy in federal constitutions.