Transfers in a polarized country: Bridging the gap between efficiency and stability

Ori Haimanko, Michel Le Breton, Shlomo Weber

Research output: Contribution to journalArticlepeer-review

41 Scopus citations

Abstract

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.

Original languageEnglish
Pages (from-to)1277-1303
Number of pages27
JournalJournal of Public Economics
Volume89
Issue number7
DOIs
StatePublished - 1 Jul 2005

Keywords

  • Efficiency
  • Polarization
  • Political equilibrium
  • Secession
  • Stability
  • Transfers

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