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institutional preferences of voters, thereby shaping the calculations of
political elites.
2. The second mechanism lies in the way in which the political interaction
between national and regional elites plays out under different systems
of representation. The weight of economic geography on elites' incen-
tives is muted by the balance between national and regional interests
in politicians' calculations, as captured by the importance attached by
regional elites to winning national elections (
) and the cost of intraparty
conflict (
). These two parameters vary along systems of representation
thereby mediating the impact of economic geography on institutional
preferences.
μ
These factors relate to the constraints faced by the political elites in charge
of adjusting fiscal structures to changing distributive scenarios. The first con-
straint is electoral as, under democracy, politicians are largely bound by their
constituencies' preferences. The second one is institutional. I analyze them in
detail in the following sections.
ECONOMIC GEOGRAPHY AND PREFERENCES
FOR FISCAL STRUCTURES
In sum, distributive conflicts associated with the geography of inequality drive
elites' preferences apart through their impact on the electoral constraints they
face. As these tensions exacerbate, the probability that either level of govern-
ment responds favorably to the possibility of institutional change diminishes.
Understanding how economic geography shapes the gap between voters and
political elites requires a more nuanced understanding of voters' preferences
(
X
i
)
. The analysis proceeds in two steps. In the first, actors just care about
income because levels of economic specialization are similar across regions.
Accordingly, the choice of fiscal structures reflects only the geography of income
of the union. In the second, I analyze a more realistic case where one of the
two regions is intensely specialized in one area of production while the other is
not.
2
Accordingly, the choice of fiscal structures reflects the geography of both
income and risk associated with regional patterns of economic specialization.
The contrast between these two unions illuminates how economic geography
shapes preferences for fiscal structures.
The Geography of Income Inequality and Preferences for Fiscal Structures
I begin by considering a union with just two regions (A and B), where indi-
viduals care about their final consumption capacity and vary in their pretax
2
Examples of concentrations of economic activity include fishing, farming, mining, manufacturing
of particular goods (e.g. cars), or IT specialized industries such as hardware and software
development.
