When is two better than one? How federalism mitigates and intensifies imperfect political competition

The current paper models power-maximizing politicians' behavior subject to imperfect political competition and perfect citizen mobility. It then analy zes the welfare implications of federal and non-federal structures. The mod el abstracts from both heterogeneous preferences (the most common argument in favor of federalism) and externalities (the most common argument against ), showing that even in this simplified setting federalism has important we lfare implications. There is one class of equilibria in which more federali sm has the purely beneficial effect of offsetting imperfections in the poli tical process. However, there is also a second class of equilibria in which citizen mobility makes political imperfections more severe by creating 'sa fe districts' for both political parties. (C) 2001 Elsevier Science B.V. Al l rights reserved.