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Information Asymmetry in Federations

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  • Alexander Mikhailovich Libman

    (German Institute for International and Security Affairs (Stiftung Wissenschaft und Politik))

Abstract

The paper investigates the problems of information transmission between levels of government in a federal state. The central government in a federation typically faces serious difficulties while collecting information on economic and political situation in the regions. There are two types of problems: lack of incentives for the regions to accurately collect information and strategic manipulation of information, which are discussed in the paper along with possible solutions. In particular, overcoming information asymmetry would require the development of national parties or informal coalitions of bureaucrats and politicians of the center and of the regions, creating incentives for regional politicians to back the successful functioning of the federal level. Furthermore, the paper discusses the issue of «informal decentralization», which emerges as a result of information asymmetry, and its consequences for the functioning of a federal state, including both advantages and disadvantages. We conclude that under information asymmetry the organization of the federation will inevitably turn into an issue of permanent negotiations and bargaining between the center and the regions, which functions as the information acquisition tool for optimal allocation of authorities in a federation.

Suggested Citation

  • Alexander Mikhailovich Libman, 2014. "Information Asymmetry in Federations," Spatial Economics=Prostranstvennaya Ekonomika, Economic Research Institute, Far Eastern Branch, Russian Academy of Sciences (Khabarovsk, Russia), issue 4, pages 9-25.
    • Handle: RePEc:far:spaeco:y:2014:i:4:p:9-25
    DOI: 10.14530/se.2014.4.009-025
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