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A large population of taxpayers can share the cost of public goods such as roads, a telephone network, defense, civil servants, and education. Alesina, Spolaore, and Wacziarg (1997) show that small countries tend to have bigger governments, and bigger government consumption, as a share of GDP. Smaller countries also face substantial costs of maintaining their distinctive language and culture. For example, the economic cost of Iceland’s language is about 3 percent of the country GNP (The Economist (1998)).
See Ter-Minassian (1997).
See Mauro (1995).
For additional discussion on constitutional provisions on country formation see Jehiel and Scotchmer (1997), Bordignon and Brusco (1999) and, in the context of government formation, Diermeier and Merlo (1999).
Since public goods are financed on a per capita basis, the quasi-linear utilities imply that Pareto efficiency can be viewed as an outcome of utilitarian optimization. If lump-sum equalization transfers between citizens are ruled out, the consistency of the whole analysis would require that efficiency and stability are examined under the same constraints on the set of available tax instruments. AS conclude that in this case there is no gap between stability and constrained efficiency: “In fact, the stable number of countries solves the problem of a Rawlsian social planner, who maximizes the utility of the least well off individual but cannot use lump-sum redistribution.”
See, e.g., Ter-Minassian (1997) and the country-specific chapters in the same book.
Note that AS’s conclusion that the optimal configuration of countries is C-stable is derived in the case of uniform distribution and it is unclear whether this result extends to a larger class of distributions considered in this paper.
Especially in Indonesia and Nigeria.
It is interesting to point out that, due to the heavy economic burden of the unification of West and East Germany, the transfer scheme used there exhibited a degree of over-equalization. As Figure 1 demonstrates, the fiscal capacity of poorer former East German provinces increased after the transfer, but the contributions paid by rich former West German states reduced their fiscal capacity below the average (Spahn and Fottinger (1997)). We argue in Section 3 that secession-proofness and over-equalization are incompatible in our model, so that the elimination of a threat of secession would rule out any over-equalizing transfer scheme.
Since each country consists of a finite number of connected regions, there always exists an optimal location of the government and, therefore, the cost function is well defined. It is useful to note that for any country S the total transportation cost is minimized when the government location chooses its location at a median m(S) of S. If S is an interval, then its median is uniquely defined. However, if country S consists of a several intervals separated from each other, the median of S is not necessarily unique. To avoid ambiguity we then denote by m(S) the leftmost median of S.
As Wittman (1991) puts it: “…two nations would join together (separate) if the economies of scale and scope and the synergy produced by their union created greater (smaller) benefits than the cost.”
Log-concavity is a special case of a more general concept of ρ-concavity studied in Hardy, Littlewood, and Polya (1934). The applications of log-concavity are relatively novel to economic and political science theory (see Caplin and Nalebuff (1991) and Weber (1992)). The difference between our set-up and the models discussed in Caplin and Nalebuff (1991) is that they impose log-concavity on density functions whereas we consider log-concavity of the distribution function.
Indeed, proceeding similarly, we obtain that splitting the interval [0, t] in two smaller intervals is beneficial if and only if
In our analysis, the population is distributed on the bounded interval [0, 1]. If instead, the citizens were distributed (uniformly) over the entire real line, the complete equalization is the unique secession-proof compensation scheme. We thank Jacques Dreze for proving this assertion and bringing it to our attention. Although simple, the argument is too tedious to be reproduced here.
This is the set of allocations examined in AS.