Optimal Territorial Scope of Laws: Subsidiarity and Legal Harmonization

A problem faced by lawmakers when planning their legislative intervention concerns the territorial scope of application of their laws. Because political units are frequently subdivided into smaller units, rules can be enacted and enforced at different levels, whether by the central government or local governments. What factors should be considered when allocating a given policy function at a particular level and how do these factors affect the growth and evolution of multi-level governments? In this chapter, we consider this question, with reference to the existing economic literature and with the aid of a model of subsidiarity and rule competition. After discussing the interplay of economies of scale, economies of scope, and heterogeneity of preferences in determining the optimal level of legal intervention, we show that the subsidiarity principle can have mixed effects as a firewall against progressive centralization. Our economic model of subsidiarity reveals that once some functions become centralized, further centralization becomes easier and often unavoidable. Contrary to its intended function, a piecemeal application of the subsidiarity principle can trigger a path-dependent avalanche of centralization, turning subsidiarity into a self-defeating statement of principle.