Keywords
., fiscal federalism, equalisation, decentralisation, secession, transfer schemes, side-payment, political economy, Valle d’Aosta, País Vasco1 IntroductionFormerly highly centralised countries like Italy and Spain have made gradual steps towards devolution. A peculiar feature of this process is the asymmetry in the fiscal treatment of different regions. Differentiation has primarily been justified by linguistic and cultural diversity, geographical circumstances, or economic backwardness. But some well-off regions receive financial resources above those of equally rich regions. They obtain special arrangements that turn them into net recipients of the fiscal system.We argue that, in centralised countries, a government that maintains a rather strict control on local fiscal autonomy agrees to compensate regions that are set back in the fiscal system and can credibly threaten to secede. We extend a political economy model of fiscal federalism with majority voting between regions to allow for secession and side-payments, following Lockwood (2006) and Harstad (2008). We derive conditions under which asymmetric fiscal arrangements or secession happen. We demonstrate that asymmetric federalism is an inefficient way of devolution as the compensation simply redistributes the available resources under centralisation.