Achieving stability in heterogeneous societies: multi-jurisdictional structures and redistribution policies

The paper explores the ways of achieving and supporting stability in multinational, heterogeneous societies. In many social, political and economic situations individuals form groups rather than operate on their own. However the benefits of combination, the economies of scale, are not unlimited: in some situations, a decentralised organisation is superior to a large, more unified social structure.

The author gives the examples of Russia, China and India as countries which themselves are composed of heterogeneous groups of individuals and regions where wealth, culture, language, religion, geography, climate and historical experience differ.

According to the author there are good reasons for a heterogeneous country to remain united, despite the fact that the centralised policies will not be ideal from the point of view of individual regions. The stability of a union depends on the trade-off between capturing increasing return to scale and satisfying diverse preferences.

The author indicates that the central government may have some policy instruments that might induce stability within a federal structure:

• granting partial autonomy
• limiting the dimensions of potential disagreement by altering the preferences of individuals and regions
• targeting subsidies towards dissatisfied or disadvantaged groups or regions.

The paper examines the possibilities for fiscal transfers to promote stable federations. The major finding of the paper is that the transfer programs that provide a type of equality can support the stability of a federation. A stable group structure exists in particular in societies where the "costs" within each group are divided equally among members. The relevant costs go beyond direct monetary costs. They include the expenses of government operations plus the sum of personalised costs of individuals caused by their dissatisfaction with the centrally adopted policies. Fiscal transfers, according to the authors could be used to equalise these costs and hence ensure stability.