The Performance and Stability of Federalism: An Institutional Perspective

The literatures on the performance of federal systems divide around three central questions. The first concerns the economic performance of federalism; the second, the political performance; and the third, the sources of stability for federal arrangements.

Economists typically focus on the first question, with an emphasis on the normative aspects, such as: How ought federalism to be designed? In answering this question, the economic theory of federalism provides a theory about the optimal organization of the state, addressing issues, such as what powers should be assigned to what levels of government; why should not the central government do everything? This literature has strong positive implications, for it also explains the economic implications of alternative divisions of powers among the various levels of government.