Optimal secession rules

Should the constitution of a federation allow for peaceful secession? Const itutionally defined secession rules are optimal ex post if the federation b reaks down. However, they may be suboptimal ex ante if the member countries receive a benefit from the perceived long-term stability of the federation and constitutionally defined secession rules increase the probability of a break-up. The optimal social contract trades off ex ante benefits and ex p ost losses, and it may avoid explicit secession rules. If transfers are cos tly, the trade-off is present even if ex post renegotiation is allowed. Fin ally, we show that under asymmetric information it is more difficult to kee p the federation together and that a secession war may occur. (C) 2001 Else vier Science B.V. All rights reserved.