DP1225 | The Break up of Nations: A Political Economy Analysis

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This paper analyses the tendency for nations to break up as a result of a trade-off between the aggregate efficiency losses from separation and the redistributive gains to the majority, which can occur in all regions, even when there are no transfers across these regions. We show that accommodating changes in fiscal policy in the unified nation may not always prevent separation, because differences in income distribution across regions mean some regions prefer more and some less redistribution; fiscal autonomy under a federal constitution may not necessarily prevent separation because of the effects of fiscal competition; linguistic imperialism in the provision of public goods may reduce the incentives to separate; perfect factor mobility eliminates the incentives to separate.