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is supposed to achieve more efficient outcomes in those policy realms affected
by cross-jurisdictional externalities.
In contrast, public choice theorists advocate federalism because it provides
an institutional arena for different levels of government to interact strategically
to maximize political returns and economic rents. Deeply anchored in these
tenets, the literature on market-preserving federalism provides a prominent
example of this line of reasoning: federalism is market friendly because it
restrains the predatory nature of the public sector through citizens' ability to
punish incumbents either with their ballot or “with their feet.” 6
As federalism sets incumbents at different levels of government to compete
for economic factors, the interplay between mobility and the behavior of subna-
tional leaders becomes critical. Welfare economists and public choice theorists
see in the mobility of economic factors an important engine behind the alleged
benefits of federalism, though again, from rather different angles. For welfare
economists, as illustrated by the seminal work by Tiebout ( 1956 ), the mobility
of citizens and capital is for the most part a mechanism of preference revela-
tion for incumbents who are assumed to be driven only by aggregate welfare
considerations. 7
For public choice theorists, both the ability of productive factors to exit
and the risk of a welfare magnet effect work to constrain Leviathan's eco-
nomic appetite. In sum, the interplay between federalism and factor mobility
promotes economic efficiency because the reduction in the size of government
is essentially reflected in lower levels of distortionary redistribution. The key
implication of these analyses is that the informational and efficiency advantages
of federal structures come at the expense of the social union. More inequality
becomes, yet again, the price tag of better markets. 8
In addition to this largely normative literature, the conventional view also
draws on empirical work on the origins and evolution of the welfare state as
well as on the more recent increase in attention to the institutional founda-
tions of inequality (Alesina and Glaeser 2004 ; Persson and Tabellini 2003 ).
The constraints on redistribution here do not come just from the expected
behavior of economic factors, but from the political system itself. Federalism
institutionalizes a system of veto points that enables defenders of specific ter-
ritorial interests to object to, and eventually block, nationwide redistributive
6 Buchanan ( 1950 , 1995 : 19-27); Buchanan and Wagner ( 1970 ); Inman and Rubinfield ( 1997 :
73-105); Weingast, Montinola and Qian ( 1995 ); Qian and Weingast ( 1997 : 83-92); Weingast
( 1993 : 286-311; 1995 : 1-31).
7
Provided that the demand for local public services is income elastic, that these services are
financed by income taxes (Oates 1972 , 1991 ), and that there is perfect mobility, Tiebout's model
predicts that communities become homogeneous in income and heterogeneous in capacities.
For a systematic discussion of the usefulness and analytical limitations of Tiebout's work, see
Bewley ( 1981 : 713-740); Panizza ( 1999 : 97-139); Rose-Ackermann ( 1983 : 55-85); Stiglitz
( 1983 : 17-55).
8
For discussions on the relationship between mobility and redistribution, see Cr emer et al. ( 1996 )
and Epple and Romer ( 1991 ).
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