Abstract
In the Federal Republic of Germany a tendency towards centralization can be identified. As it is difficult to decide whether this tendency increases or decreases welfare, a conceptual framework is developed that is based on an extended notion of costs in that it also allows a comparison of political with economic costs in the traditional sense. This approach allows the conceptual determination of an optimal degree of centralization/decentralization that depends on preference costs of citizens on the one hand [for instance, the costs of violated (‘frustrated’) values by a more centralized system] and resource costs (which increase with decentralization) on the other. This analysis also comprises as intermediate steps the derivation of certain principles that are elements of the theory of fiscal federalism.
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