Democratization, Secessions, and Fiscal Institutions

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9414719 Alesina The last decade has witnessed an unprecedented process of democratization, not only in Eastern Europe but also in large parts of the developing world. At the same time, and partly as a result of this institutional change, the borders of nations have been redrawn to an extent which is quite exceptional for modern peacetime history. Fiscal issues are crucial determinants of decisions concerning borders of political jurisdictions. In fact, the definition of borders and the political mechanisms which lead to fiscal decisions greatly influence the final distribution of costs and benefits of taxation and spending. For example, much of the difficulty in ratifying the Maastricht agreement lies in the fear that richer and/or more fiscally "responsible" countries and regions will bear some of the fiscal burden of poorer and/or less responsible regions. This research project studies the interaction between fiscal policy decisions and the definition of boundaries of political jurisdictions. In particular, it examines how democratization leads to changes in social choice decisions concerning both political boundaries and fiscal (de)centralization. Models with social planners have suggested various arguments in favor of centralized fiscal decisions in relatively large political jurisdictions, particularly when the redistributive aspects of fiscal policy are important. This implication appears inconsistent with the recent tendency toward secessionism and the renewed difficulties of moving toward a political union in the European community. We emphasize how diversity and heterogeneity among individuals and regions influence, through the voting process, the decision about (de)centralization and the definition of boundaries. Heterogeneity with voting gives rise to a much richer and more realistic set of results, relative to social planner models. The project considers several aspects of this general problem by focusing on different types o f fiscal policy, i.e., public good provision, insurance, redistribution, on different types of institutions, i.e., dictatorial regimes versus democratic ones, different voting rules, and other institutional differences.