Bulletin n. 1/2005 | ||
December 2005 | ||
Haimanko Ori, Le Breton Michel, Weber Shlomo |
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Transfers in a polarized country: bridging the gap between efficiency and stability | ||
in Journal of Public Economics , Volume 89, Issue 7 , 2005 , 1277-1303 | ||
We consider a political economy model of country whose citizens have heterogeneous preferences for a national policy and some regions may contemplate a threat of secession. The country is efficient if its breakup into smaller countries leads to an aggregate utility loss. We show that in an efficient country whose citizens' preferences exhibit a high degree of polarization, a threat of secession cannot be eliminated without inter-regional transfers. We also demonstrate that if majority voting is used to determine the redistribution schemes within the country, then a high degree of polarization yields the full-compensation scheme as the unique political equilibrium. | ||