Institutional design, political competition and spillovers

We establish a link between the best system of government and the strength of inter-state spillovers within a model of political competition with self-interested parties. We show the superiority of the unitary system when: inter-state spillovers are strong; the ego rents of local parties are high; and the system of government is chosen under a veil of ignorance. •We study unitary vs federal systems within a model of political competition.•Parties face a trade-off between their power and winning the election.•The unitary system is better if interstate spillovers and local ego rents are high.•The unitary system is better in the worst-case scenario.•Excessive (de)centralization leads to larger losses if spillovers are (weak) strong.