The Benefits of Federalism and the Risk of Overcentralization

This is the authors' abstract. We don't add key points for this paper.

In the economic literature on federalism, centralization is frequently identified with overall homogeneous policies, reactions in the post constitutional political process are often neglected, and comparative analysis is rarely carried out. This contribution presents some elements of a more comparative, process oriented approach. The citizens' incentives to make use of the voice and exit options are analyzed. Federalism strengthens both exit and voice. Centralization is endogenous: governments delegate tasks selfishly to higher levels, hence overcentralization may result. A future European constitution should, therefore, promote federalism in order to prevent endogenous overcentralization. This cannot be achieved without strengthening direct democracy.