Externalities vs. Internalities : A Theory of Political Integration

Decentralized government lead to inter-regional externalities. Whereas an integrated jurisdiction solves the externality problem, centralized government entails other costs--in particular a neglect for minority interests. The paper models formally the trade-off between these two forces in determining the optimum as well as the equilibrium design of jurisdictions. Both the relative size of regions and the distribution of tastes are shown to be important parameters of the problem