Towards an economic theory of overlapping political jurisdictions

The debate on fiscal federalism in the European Community has become intense as the deadline for the creation of a single market draws nearer. This development stems from two broad classes of reasons. First of all, there are immediate effects from markets’ integration. Without barriers to trade taxes may need to be harmonized, compromising the ability of any single country to pursue policies in isolation. Redistributive measures in particular will have to be deferred to the Community [see, for example, van Rompuy, Abraham and Heremans (1990)]. At the same time, the movement to a single market will probably benefit some countries and harm others. The need to compensate the losers implies again a widened fiscal role for the Community. These are the main motivations behind the anticipated doubling of the Community’s Structural Funds from ECU 7.7 billions in 1988 to ECU 14.5 billions by 1993 (in 1988 prices).’ The second contribution to the current debate stems more generally from reflections upon the link between the evolution of private markets and the establishment of new institutions. We define markets as sets of rules for the exchange of private goods, and institutions as organizations for the provision