The art of making everybody happy: how to prevent a secession

In this paper we examine compensation schemes that prevent a threat of secession by all country's regions and in the same time provide no incentives for citizens' migration within the country. We prove that, under quite general assumptions on the distribution of citizens' preferences, there exist transfer schemes that are both secession-proof and migration-proof. Moreover, we show that these compensation schemes entail a degree of partial equalization among the regions: the gap between advantageous regions has to be reduced but it should never be completely eliminated. We demonstrate that in the case of a uniform distribution of the nation citizens', the secession-proof and migration-proof conditions generate the 50% compensation rule for disadvantageous regions.