In Discussion Paper No. 1225, Research Fellow Patrick Bolton and Programme Director Gérard Roland analyse the incentives of nations with democratic political institutions to separate into several new countries. Their initial supposition is that from an economic efficiency point of view, it is never desirable for a nation to separate into several independent parts because any benefits of decentralization that might be obtained in a world with several nations can always be achieved within a unified nation by replicating the administrative structure of a decentralized world. Benefits of unification are not necessarily evenly distributed among all citizens, however, which gives rise to the question of when majority voting may trigger separation, regional autonomy or unification.

The main focus of the paper is on regional conflicts over fiscal policy arising from differences in income distribution across regions. Regional median voters generally have divergent preferred tax rates, depending on the degree of regional income inequality and wealth. When contemplating a move towards separation, they must weigh efficiency benefits of the union against the benefits of having a government 'closer to the people'. Within this framework, the authors discuss issues of how to reconcile divergent tax preferences between regions of different and similar wealth, decentralized tax determination and the resulting regional tax competition. Under perfect factor mobility, regions set the same tax rates in equilibrium and have the same per capita and median income. In these conditions, any attempt to break away would be self-defeating. The authors show that when linguistic and economic conflicts are combined, it is not always the case that the likelihood of separation is greater.

The Break-up of Nations: A Political Economy Analysis
Patrick Bolton and Gérard Roland

Discussion Paper No. 1225, August 1995 (IM)