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redistribution. However, to analyze the origin of fiscal structures these two
dimensions must be separated and the hierarchy between them understood.
In this topic, I assume that the design of fiscal structures involves: first, a
choice about the decentralization of taxes on and transfers to individuals; and
then a choice about the amount of resource redistribution between regions.
Interregional redistribution derives from decentralization in the allocation of
resources between regions. It only becomes an issue if regional governments
are, at least partly, involved in interpersonal redistribution. At the end of the
process, there are three possible outcomes of political contentions over fiscal
structures:
A centralized fiscal structure, henceforth denoted as C, where the central
government controls all taxes and transfers exclusively.
A decentralized fiscal structure, henceforth denoted as D, where regions are
in charge of interpersonal redistribution, and there is very little redistribution
of resources between the regions.
Finally, a hybrid system, henceforth denoted as H, consisting of a decentral-
ized fiscal structure with significant interregional redistribution.
This chapter analyzes the choice between these options as the joint outcome
of (1) the political demand for change in fiscal structures associated with eco-
nomic geography and (2) a given set of mechanisms for political representation.
The main elements of the model are as follows. In unions with several levels of
government, the interplay between local and national elites drives the political
process. Local elites value regional government positions but also benefit from
their party winning the national election. Likewise, national elites gain utility
from holding the national executive as well as when their party wins regional
elections. Accordingly, their respective utility functions are defined as follows:
The utility of the any given party ( P ) leader in a district ( r ) is defined by:
+ q n φ
r
U r
p r λ
P
r
P
=
(1)
where p r
represents the probability of party P conquering the regional exec-
P
utive, and
r represents the rewards obtained by regional party elites holding
office at the regional level. The second half of the expression captures the ben-
efits that regional party leaders obtain from having their national elites win the
national elections. Thus, q n
λ
represents the probability of party P conquering
P
the national executive and
r captures the utility gains derived from having the
same party control the national executive.
In turn, the utility of P's national leadership is captured by:
φ
p r χ
r
U n
q n λ
n
=
+ (
1
)
(2)
n represents the rewards obtained by national party elites from holding
office at the national level and
where
λ
r captures the benefits that the national elite
of party P derive from winning elections in region r.
χ
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