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The Optimal Number of Governments ACCORDING TO THE usual economic formulation, corporations are hierarchies bounded by markets (Coase 1937; Williamson 1995). Small firms require less hierarchy and more markets, whereas large firms require more hierarchy and fewer markets. For example, an automobile manufacturer can buy tires for its cars from another corporation or make tires in a subsidiary. Buying tires involves two firms using a market, whereas making tires involves one firm using hierarchical organization. The relative efficiency of buying or making a private good depends on the relative efficiency of markets and hierarchies. The optimal hierarchy in firms and the optimal number of markets pose the same problem. Just as the private sector consists of markets and hierarchies, so the public sector consists of governments and hierarchies. In democracy, the citizens elect their government, so democratic states are hierarchies bounded by elections. Centralized states require fewer governments and more hierarchy, whereas decentralized states require more governments and less hierarchy. For example, the national assembly can direct the ministry of education to provide schools for all

Publisher

Princeton University Press

Published

2000

Language

EN