Lessons in fiscal federalism from American Indian nations

Since Native Americans were relegated to reservations in the nineteenth century, their governance structures have been dictated largely from Washington, leaving little room for an optimal mix of tribal, federal, and state control to evolve. This chapter explores the optimal mix with respect to law enforcement and natural resource management. The key advantages of decentralized tribal control lie with its conformity to local norms of legitimacy, and with its better incentives for maximizing returns from local resources. The key advantage of the larger nodes of government lies with scale economies in resource management and in the provision of a uniform rule of law. Based on these tradeoffs, we argue that some responsibilities are ill-suited for non-local control (e.g., jurisdiction over reservation crime) whereas others are well-suited (e.g., jurisdiction over commercial contracts involving non-Indians). We explain why local jurisdiction over contracts, and top-down control of natural resources by the federal government, can stunt economic development on reservations. We evaluate these arguments by reviewing empirical studies, and by analyzing a novel reservation-level panel data set spanning 1915–2010. The evidence from both sources suggests the current mix of governance authority – which has largely been imposed on tribes rather than chosen by them – has slowed income growth. We conclude that tribes should be free to choose a different system of federalism and we identify some potential barriers to a freer choice.