No abstract

Highly centralised countries like Italy and Spain have devolved fiscal power to regions in an asymmetric way. Some well-off regions get transfers that turn them into net recipients of the fiscal system. We demonstrate in a political economy model of fiscal federalism that, in centralised countries, side-payments are used to compensate regions that are set back by the fiscal system and can credibly threaten to secede. Compensation blocks political negotiation on alternative-more efficient-fiscal systems. We study two regions, Valle d'Aosta in Italy and Pais Vasco in Spain, as an example.