Pure public goods and income redistribution in a federation with decentralized leadership and imperfect labor mobility

We examine the non-cooperative provision of a pure 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 makes interregional income transfers after it observes the contributions to the pure 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 pure public good and interregional transfers are generally allocated efficiently in a federation with decentralized leadership. (C) 2000 Elsevier Science S.A. All rights reserved.