Divided We Stad: a Fiscal Bargaining Model for Divided Countries

Vanschoonbeek, Jakob (2020): Divided We Stad: a Fiscal Bargaining Model for Divided Countries.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Secession and unification, political economy, fiscal policy, fiscal federalism, decentralization, transfer schemes, quantitative models, Belgium
• Subjects: C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C70 - General; D - Microeconomics > D7 - Analysis of Collective Decision-Making > D71 - Social Choice ; Clubs ; Committees ; Associations; H - Public Economics > H4 - Publicly Provided Goods > H41 - Public Goods; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H71 - State and Local Taxation, Subsidies, and Revenue; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H77 - Intergovernmental Relations ; Federalism ; Secession

References

Acemoglu, D., & Robinson, J. A. (2000). Why Did the West Extend the Franchise? Democracy, Inequality, and Growth in Historical Perspective. The Quarterly Journal of Economics, 115 (4), 1167-1199.

Adsera, A., & Boix, C. (2002). Trade, Democracy, and the Size of the Public Sector: The Political Underpinnings of Openness. International Organization, 56 (2), 229-262.

Alesina, A., Baqir, R., & Easterly, W. (1999). Public Goods and Ethnic Divisions. The Quarterly Journal of Economics, 114 (4), 1243-1284.

Alesina, A., Baqir, R., & Hoxby, C. (2004). Political Jurisdictions in Heterogeneous Communities. Journal of Political Economy, 112 (2), 348-396.

Alesina, A., & Spolaore, E. (1997). On the Number and Size of Nations. The Quarterly Journal of Economics, 112 (4), 1027-1056.

Alesina, A., & Spolaore, E. (2003). The Size of Nations. Cambridge: MIT Press.

Banerjee, A., Iyer, L., & Somanathan, R. (2005). History, Social Divisions, and Public Goods in Rural India. Journal of the European Economic Association, 3 (2-3), 639-647.

Banerjee, A., Iyer, L., & Somanathan, R. (2007). Chapter 49 Public Action for Public Goods. In P. T. Schultz & J. Strauss (Eds.), Handbook of development economics (Vol. 4, pp. 3117-3154). Oxford.

Bolton, P., & Roland, G. (1997). The Breakup of Nations: a Political Economy Analysis. The Quarterly Journal of Economics, 112 (4), 1057-1090.

Buchanan, J., & Faith, R. (1987). Secession and the Limits of Taxation: Toward a Theory of Internal Exit. American Economic Review, 77 (5), 1023-1031.

Buyst, E. (2010). Reversal of Fortune in a Small, Open Economy: Regional GDP in Belgium, 1896-2000. Rivista di Storia Economica, 26 , 75-92.

Caramani, D. (2004). The Societies of Europe. New York: Palgrave Macmillan.

Claeys, P., & Martire, F. (2015). 'If You Want Me To Stay, Pay': a Model of Asymmetric Federalism in Centralised Countries. Environment and Planning C: Government and Policy, 33 (2), 305-320.

Dalton, R. J. (1996). Political Cleavages, Issues, and Electoral Change. In L. LeDuc, R. G. Niemi, & P. Norris (Eds.), Comparing democracies: Elections and voting in global perspective (pp. 319-342). Thousand Oaks, CA: Sage Publications.

De Wever, B., Verdoodt, F.-J., & Vrints, A. (2011). De Vlaamse Patriotten en de Natievorming. Hoe de Vlaamse Natie Ophield `Klein' te Zijn. Wetenschappelijke Tijdingen, 4 , 217-248.

de Smaele, H. (2011). How `real' is Right-Wing Flanders. In B. De Wever (Ed.), Re-bel e-book 12: Right-wing flanders, left-wing wallonia? is this so? if so, why? and is it a problem? (pp. 6{10). Brussels: Re-Bel Initiative.

Desmet, K., Le Breton, M., Ortuno-Ortin, I., & Weber, S. (2011). The Stability and Breakup of Nations: A Quantitative Analysis. Journal of Economic Growth, 16 (3), 183-213.

Desmet, K., Ortu~no-ortin, I., & Wacziarg, R. (2017). Culture, Ethnicity, and Diversity. American Economic Review, 107 (9), 2479-2513.

Desmet, K., Ortuno-ortin, I., & Weber, S. (2017). Peripheral Diversity: Transfers Versus Public Goods. Social Choice and Welfare, 1-37.

Etro, F. (2006). Political Geography. Public Choice, 127 (3-4), 321-343.

Fearon, J., & Van Houten, P. (2002). The Politicization of Cultural and Economic Difference: a Return to the Theory of Regional Autonomy Movements. Paper Presented at the Fifth Meeting of the Laboratory in Comparative Ethnic Processes.

Feenstra, R. C., Inklaar, R., & Timmer, M. P. (2015). The Next Generation of the Penn World Table. American Economic Review, 105 (10), 3150-3182.

Flora, P., Kraus, F., & Pfenning, W. (1983). State, Economy, and Society in Western Europe 1815-1975. Frankfurt: Campus Verlag.

Gancia, G. A., Ponzetto, G. A. M., & Ventura, J. (2017). Globalization and Political Structure. CEPR Discussion Paper No. 111592 , 1-51.

Gehring, K., & Schneider, S. A. (2020). Regional Resources and Democratic Secessionism. Journal of Public Economics, 181 , 1-18.

Gennaioli, N., & Tabellini, G. (2018). Identity , Beliefs, and Political Conflict. CEPR Discussion Paper 13390 , 1-64.

Gerard, M. (2014). Economic Aspects of Constitutional Change: the Case of Belgium. Oxford Review of Economic Policy, 30 (2), 257-276.

Griffiths, R. D. (2014). Secession and the Invisible Hand of the International System. Review of International Studies, 40 (3), 559-581.

Griffiths, R. D. (2015). Between Dissolution and Blood: How Administrative Lines and Categories Shape Secessionist Outcomes. International Organization, 69 (3), 731-751.

Griffiths, R. D. (2016). Age of Secession: the International and Domestic Determinants of State Birth. Cambridge: Cambridge University Press.

Haimanko, O., Le Breton, M., & Weber, S. (2005). Transfers in a Polarized Country: Bridging the Gap Between Efficiency and Stability. Journal of Public Economics, 89 (7), 1277-1303.

IMF. (2019). The IMF Fiscal Decentralization Dataset. Retrieved 2019-07-24, from https://data.imf.org/?sk=1C28EBFB-62B3-4B0C-AED3-048EEEBB684F

Inglehart, R. (1971). The Silent Revolution in Europe: Intergenerational Change in Post-Industrial Societies. The American Political Science Review, 65 (4), 991-1017.

Inglehart, R. (1981). Post-Materialism in an Environment of Insecurity. The American Political Science Review, 75 (4), 880-900.

Inglehart, R., & Norris, P. (2016). Trump, Brexit and the Rise of Populism: Economic Have-Nots and Cultural Backlash. In American political science association annual meeting (pp. 1-52). Philadelphia.

Kollman, K., Caramani, D., Backer, D., & Lublin, D. (2019). Constituency-level Elections Archive [data file and codebook]. Retrieved from http://www.electiondataarchive.org

La Porta, R., Lopez-de Silanes, F., Shleifer, A., & Vishny, R. (1999). Quality of Government. The Journal of Law, Economics and Organization, 15 (1), 222-279.

Lake, D. A., & O'Mahony, A. (2004). The Incredible Shrinking State: Explaining Change in the Territorial Size of Countries. Journal of Conflict Resolution, 48 (5), 699-722.

Le Breton, M., & Weber, S. (2003). The Art of Making Everybody Happy : How to Prevent a Secession. IMF Staff Papers, 50 (3), 403-435.

Maslow, A. H. (1954). Motivation and Personality. New York: Harper & Brothers. Miguel, E., & Gugerty, M. K. (2005). Ethnic Diversity, Social Sanctions, and Public Goods in Kenya. Journal of Public Economics, 89 (11-12), 2325-2368.

Montalvo, J. G., & Reynal-Querol, M. (2005). Ethnic Polarization, Potential Conflict, and Civil Wars. The American Economic Review, 95 (3), 796-816.

Nieuw-Vlaamse Alliantie. (2015). Nieuw-Vlaamse Alliantie - Statuten. Retrieved 2016-06-01, from http://www.n-va.be/sites/default/files/documents/PDF/statuten20151012.pdf

OECD. (2019). Revenue Statistics. Retrieved 2019-07-26, from https://stats.oecd.org/Index.aspx?DataSetCode=REV

Rodriguez-pose, A. (2017). When Rich Places Want to Secede. Retrieved 2019-07-29, from https://www.theatlantic.com/business/archive/2017/10/catalonia-secede-rich-region/544244/

Rodriguez-pose, A. (2018). The Revenge of the Places That Don't Matter (and What To Do About It ). Cambridge Journal of Regions, Economy and Society, 11 , 189-209.

Rodrik, D. (2017). Populism and the Economics of Globalization. NBER Working Paper 23559 , 1-43.

Roses, J. R., & Wolf, N. (2019). The Economic Development of Europe's Regions: A Quantitative History since 1900 (J. R. Roses & N. Wolf, Eds.). Oxon: Routledge.

Spolaore, E. (2009). Efficiency and Stability of National Borders. Review of Business and Economic Literature, 54 (1), 4-22.

Spolaore, E. (2010). Federalism, Regional Redistribution, and Country Stability. In N. Bosch, M. Espasa, & A. Solé Ollé (Eds.), The political economy of inter-regional fiscal flows: Measurement, determinants and effects on country stability. (pp. 329-356). Massachusetts: Edward Elgar Publishing.

Spolaore, E. (2016). The Economics of Political Borders. In E. Kontorovich & F. Parisi (Eds.), Economic analysis of international law (pp. 1-304). Cheltenham: Edward Elgar Publishing.

Staal, K. (2010). Incentives for Separation and Incentives for Public Good. Public Choice, 145 , 531-546.

Suesse, M. (2018). Adjusting the Size of Nations: Empirical Determinants of Separatism and the Soviet Breakup. Journal of Comparative Economics, 47 (1), 1-15.

Tanzi, V., & Schuknecht, L. (2000). Public Spending in the 20th Century A Global Perspective. Cambridge: Cambridge University Press.

The Economist. (2016). Rage Against the Dying of the Light. Retrieved 2019-07-29, from https://www.economist.com/finance-and-economics/2016/12/15/place-based-economic-policies-as-a-response-to-populism?fsrc=scn/tw/te/bl/ed/

The Maddison Project. (2017). The Maddison Project Database 2013. Retrieved from http://www.ggdc.net/maddison/maddison-project/data.htm.

Van Zanden, J. L., Baten, J., Foldvari, P., & Van Leeuwen, B. (2014). The Changing Shape of Global Inequality 1820-2000; Exploring a New Dataset. Review of Income and Wealth, 60 (2), 279-297. Retrieved from https://clio-infra.eu/data/IncomeInequality{ }Broad.xlsx

Vanhanen, T. (2000). Polyarchy Dataset. Retrieved 2019-03-01, from https://www.prio.org/Global/upload/CSCW/Data/Governance/file42535{ }polyarchy{ }v2.dta

Vanschoonbeek, J. (2020). Regional (In)Stability in Europe: a Quantitative Model of State Fragmentation. Journal of Comparative Economics, 1-53.

World Bank. (2019). World Development Indicators. Retrieved 2017-01-10, from http://data.worldbank.org/data-catalog/world-development-indicators