We examine the non-cooperative provision of a pure public good by regional governmentsin a federation similar to the European Union, where regional governments areStackelberg leaders and the central government is a Stackelberg follower — a federationwith decentralized leadership. The center makes interregional income transfers after itobserves the contributions to the pure public good. Imperfectly mobile workers react toregional and central governments’ policies by establishing residence in their most preferredregion. Despite the degree of labor mobility, we show that the pure public good andinterregional transfers are generally allocated efficiently in a federation with decentralizedleadership.
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