| Abstract |
Demographic or technological change may lead to existing political boundaries becoming inappropriate. However, with heterogenous preferences, any proposed change is unlikely to be unanimously supported. In the absence of a central planner, how should these boundaries be changed? We construct a model of "self-determination", in which pre-defined units are able to form new political jurisdictions. Jurisdictions provide public goods that exhibit efficiencies of scale, but residents experience disutility from heterogeneity. If units given a "right of self-determination" are large, then boundaries are not adjusted to reflect local conditions. On the other hand, if units are small, a "fiscal externality" leads to bizarre boundaries emerging.
There is thus an optimal size for units of self-determination. The model provides an answer based on economic theory to a long-standing political question regarding self-determination: "if Quebec can separate from Canada, why can't Montreal separate from Quebec?" |