Public Finance, 2nd Edition

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OPTIMAL FEDERALISM: SORTING

THE FUNCTIONS OF

GOVERNMENT WITHIN THE

FISCAL HIERARCHY

THE POTENTIAL FOR INCOMPATIBILITIES AND

DESTRUCTIVE COMPETITION

The Two Fundamental Sorting Questions of Fiscal Federalism

Social Welfare within Fiscal Federalism

SORTING THE FUNCTIONS OF GOVERNMENT WITHIN THE

FISCAL HIERARCHY

Stigler's Prescription for an Optimal Federalism

Oates' Perfect Correspondence

Oates' Decentralization Theorem

Misperceived Preferences

Local Autonomy in a First-Best Environment?

OPTIMAL FEDERALISM AND THE DISTRIBUTION FUNCTION

Redistribution, the Competition Problem, and Potential Incompatibilities

Criticisms of the Prevailing Model

The Need for Local Social Welfare Functions

Optimal Redistribution in a Federalist System: An Alternative Model

Comments on Our Alternative Model

Federalism refers to a hierarchical structure of governments in which

each person is, simultaneously, a citizen of more than one government. The

United States is an example, with its national government, 50 state govern-

ments, and over 89,000 local governmental entities, including cities, towns,

counties, regional transportation authorities, metropolitan district commis-

sions, and the like. Each person in the United States falls within the jurisdic-

tion of at least three, and often four or more, distinct governmental bodies.

The United States is hardly unique is this regard; all the industrialized market

economies have a federalist structure.

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