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Divided We Stad: a Fiscal Bargaining Model for Divided Countries

Author

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  • Vanschoonbeek, Jakob
Abstract
I propose a multi-region fiscal bargaining model, where country border stability is determined by a trade-off between preference heterogeneity, income inequality and scale economies in the provision of public policy. I demonstrate how increasing preference heterogeneity can actually increase border stability in this framework; by increasing political disagreements over government expenditures, it functions as a tax-reducing mechanism that brings equilibrium tax rates more in line with the fiscal preferences of the discontented and the wealthy. I provide empirical evidence for the model's main predictions in a large panel of countries over the past half-century. I also show its capacity to match some of the main fiscal and political evolutions in Belgium since its inception. The model provides a rationale for the observed border stability in highly politically heterogeneous and economically unequal countries, such as Belgium, which is difficult to explain in existing models.

Suggested Citation

  • Vanschoonbeek, Jakob, 2020. "Divided We Stad: a Fiscal Bargaining Model for Divided Countries," MPRA Paper 101863, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:101863
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    More about this item

    Keywords

    Secession and unification; political economy; fiscal policy; fiscal federalism; decentralization; transfer schemes; quantitative models; Belgium;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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