3bis -Secessions and the size of nations Flashcards
Positive aspects of large countries
- Lower cost per capita of providing public goods- more taxpayers and economies of scale
- More able to provide insurance to regions affected by shocks
- Possibility to redistribute to poorer regions
- Larger domestic market when there are barriers to trade
Negative aspects of large countries
- More administrative costs
- Higher heterogeneity of preferences
To finance the public good, taxes for individual i
ti= f/Pj(i) +v
Unified country
- Average distance from the government is ¼
- average utility is
Ua=u*(y-v-f/P)-h/4
utility of consumption: income- taxes -heterogeneity
Two separate countries
- Average distance from the government is now 1/8 –so a lower heterogeneity
- Average utility is
Ub=u*(y-v-2f/P)-h/8
Unified country is more efficient if
difference in utility > difference in costs = h/8
People will vote for split if
change in utility < h/4
Three different effects of the trade-off (united or not)
- Economies of scale in unified country
- Political effect: ability to set the fiscal policy in your region but not in unified country
- Tax base effect: if region is poorer than unified country, incentive to stay united
Economic performance depends:
- Positively on size
- Positively on country’s openness
- Negatively on the interaction of size and openness
Size matters for..
military power
- Larger countries can provide cheaper and better security
- As the world becomes more peaceful, higher incentives to break up
Utility for individual i
Ui =u(ci)+gi
ci: consumption
gi: public good
To provide services, the government must pay a cost kj(i)
kj(i) =f +vPj(i)
• a fixed part f >0
• variable part v, proportional to the size of the nation Pj(i)
so inefficient break ups when
h/8
Model with inequality
Individual i utility is
Ui =ci =(1−τ)yi +R
τ is the tax
Region j prefers unification iff for median in j
Uu(yjm) > Uj(yjm)
