Inequality and the territorial fragmentation of solidarity

A long tradition of research has shown decentralized political structures as an important cause behind lower levels of redistribution and higher levels of inequality. This article offers an alternative interpretation of the association between fragmented fiscal structures and higher levels of inequality. I argue that the distributive effects of decentralization depend on the preexisting territorial patterns of inequality. Therefore, the political choice between alternative fiscal structures is largely driven by their expected distributive consequences. As a result, the territorial structure of inequality becomes an important factor to explain why some fiscal structures are more integrated than others. Two mechanisms link regional income distributions and preferences about the decentralization of redistributive policy: differences in the demand for redistribution associated with interregional income differences, and differences in the demand for social insurance associated with the incidence of labor market risks. I test the argument using a data set of fourteen countries in the Organization for Economic Cooperation and Development (OECD) over the period 1980-2000. In addition, I illustrate the potential of the approach by analyzing why social solidarity remains territorially fragmented in the European Union despite the fact that it has a common currency and a common market.