The Comparative Law and Economics of Federalism

Thomas S. Ulen1

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The use of economic analysis to explain why rules and institutions differ or are similar across legal systems is in its infancy. There is not yet a comprehensive economic theory of comparative law, but there are two vital pieces of such a theory. First, there is a legal theory of comparative law and some confirming empirical evidence for that theory, and, second, there is a reasonably-settled body of scholarship in law and economics.

In this paper I try to bring these two pieces together and apply them to a comparative law issue. First, I briefly summarize a legal theory of comparative law and contrast that with a sketch of an economic theory of comparative legal rules and institutions. Second, I apply this elemental economic theory to the issue of comparative federalism. I first discuss a general economic theory of federalism, independent of any particular legal system, in which I focus on the costs and benefits of establishing and altering an agreement to form a federation. I then speculate on how differences in those costs and benefits could explain the actual differences in, say, the division of governmental responsibility between the constituent members of the federation and the central government. I then briefly compare the differences between federalism in the United States and Canada in order to see if the comparative economic theory accounts for those differences.

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1 Professor of Law and of Economics, College of Law, Institute of Government and Public Affairs, and Department of Economics, University of Illinois at Urbana-Champaign. I would like to thank Christine Pfeifer, Stefan de Boeck, and Dean Gournis for their very helpful research assistance, and Ian Ayres, Dirk Heremans, Jim Pfander, Stephen Ross, and Earl Clay Ulen, Jr., for their valuable comments and suggestions. I owe a special debt of gratitude to the members of the Comparative Law and Economic Forum for their extremely useful discussion of an earlier draft of this paper.