Federalism as a Commitment to Preserving Market Incentives

TLDR

The authors propose a new perspective that frames federalism as a governance solution to preserve market incentives. They argue that federalism preserves market incentives by preventing the state from compromising future economic success or bailing out failures, using decentralization of information and authority and interjurisdictional competition to create credible commitment. They find that certain forms of federalism can be self‑sustaining.

Abstract

The authors advance a new perspective in the study of federalism. Their approach views federalism as a governance solution of the state to credibly preserving market incentives. Market incentives are preserved if the state is credibly prevented from compromising on future economic success and from bailing out future failures. The salient features of federalism--decentralization of information and authority and interjurisdictional competition--help provide credible commitment or these purposes. In addition, the authors suggest that some federalism are self-sustaining.