We examine the noncooperative provision of an impure public good by regional governments in a federation similar to the European Union, where regional governments are Stackelberg leaders and the central government is a Stackelberg follower-a federation with decentralized leadership. The center redistributes income and provides budget-balanced lump-sum matching grants after it observes the regions' contributions to the impure public good. Imperfectly mobile workers react to regional and central governments' policies by establishing residence in their most preferred region. Despite the degree of labor mobility, we show that the allocation of the impure public good and the interregional income redistribution policy are generally efficiently in a federation with decentralized leadership.
Available at: http://works.bepress.com/arthur_caplan/105/