Self-Enforcing Federalism

Abstract

How are constitutional rules sustained? We investigate this problem in the context of how the institutions of federalism are sustained. As Riker (1964) emphasizes, a central design problem of federalism is how to create institutions that at once grant the central government enough authority to provide central goods and police the subunits, but not so much that it usurps all public authority. Using a game theoretic model of institutional choice, we argue that, to survive, federal structures must be self-enforcing: the center and the states must have incentives to fulfill their obligations within the limits of federal bargains. Our model investigates the trade-offs among the benefits from central goods provision, the ability of the center to impose penalties for noncompliance, and the costs of states to exit. We also show that federal constitutions can act as coordinating devices or focal solutions that allow the units to coordinate on trigger strategies in order to police the center. Finally, the model generates a number of comparative statics concerning the degree of central power, the division of rents between the states and the center, and the degree of “central goods” provided as a function of the characteristics of the constituent units.