Economic theory shows that the decision for a region to remain in a country (or a union) or to secede results from a trade-off between the benefits of being part of a large country, and the costs associated with more heterogeneity. Literature confirms the importance of these trade-offs and shows that decentralization may be effective to accommodate secessionist conflicts only if certain conditions are fulfilled.
The economic theory of secession considers that both the size and the borders of nations result from the interplay of centripetal and centrifugal forces. The former are mainly due to the benefits associated to a large population size, while the latter are mainly related to the fact that large countries are likely to be more heterogeneous In this respect, both the optimal size of a country and the optimal number of countries across the world can be defined as a trade-off between benefits of size and the costs of heterogeneity. Optimal size must be understood as the size that maximizes the average welfare of individuals. Of course, nothing ensures that existing political institutions lead to this optimal size. Besides, whether countries are ruled by democratically elected politicians or by rent-maximizing dictators (Leviathans) matters to explain how borders are set or redrawn. Put differently, autocratic and democratic regimes are likely to lead to different outcomes regarding the countries’ sizes as the objective of the rulers is not the same in each.
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Secession can be seen as an extreme case of decentralization, when all the prerogatives of the State (tax and spending) are transferred to the local political unit. The literature on fiscal federalism has largely debated the (in) efficiency of decentralization. All the previous mechanisms determining the occurrence of secession are also at play when it comes to define the “optimal” architecture of the state. On the spending side, some public goods may be locally delivered to better match populations’ preferences while others should remain supplied centrally to avoid duplication costs or the loss of scale economies. On the revenue side, granting subnational governments with more autonomy is expected to improve the accountability of local officials, but it would also induce a risk of harmful tax competition named “race to the bottom”.
Swiss Journal of Economics and Statistics volume 154, Article number: 19 (2018)