Federalism as a Commitment to Preserving Market Incentives

Fall, 1997 Journal of Economic Perspectives, Volume 11, Number 4, pp.83-92, Fall 1997 <p> We advance a new perspective in the study of federalism. Our 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 inter-jurisdiction competition — help provide credible commitment for these purposes. In addition, we discuss factors relevant for sustaining federalism.