Volltext: Very small countries: economic success against all odds Preference adequacy The extent of preference adequacy is a central idea in economics, especi- ally in the economic theory of federalism. It depicts the hitherto neglec- ted demand side in our concept. Figure 4.2 gives an overview of its mean ing by displaying per-capita provision costs of public goods (CO) and the marginal costs of not being able to comply with individual pre- ferences, which we denote non-PA, because it can be viewed as the in- verse of preference adequacy. It is obvious and intuitive that cost opti- mality and preference adequacy point in different directions. Figure 4.2 displays a pure public good, where the theoretically optimal number of consumers with regard to costs is infinite. In contrast, compliance with the preferences of the consumers decreases with an increasing number of consumers. Hence, non-PA is an increasing function of the number of consumers. The point of intersection of the two functions displays opti- mal jurisdiction size. Note that we assume in Figure 4.2 that the two func tions are monotone and differentiable, which does not have to be the case in reality. On the demand side, smaller countries have the benefit of being able to avoid a set of problems typical of larger countries (especially conges - tion74, heterogeneity costs and costs of coordination). Additionally, po- litical decisions are expected to be generally more in line with the elec- torate’s preferences in smaller countries. Assuming that every inhabitant of a country has an individually optimal quantity-quality point on a continuous scale for any public good provided (for any policy pursued by the government), the sum of distances between those optimal points of all inhabitants and the point depicting the political decision(s) made is supposed to be smaller in small countries than in larger ones. To put it differently, 
«the average cultural or preference distance between indivi- duals is likely to be positively correlated with the size of the country» (Alesina and Spolaore, 1997, p. 1029). This fact is generally attributed to the lack of cross-cutting cleavages and ethnic fractionalization as well as due to the cultural homogeneity of VSC.75 80 
Very small countries: organizational choice and international outsourcing 74City states are a notable exception. 75Note that Chapter 5 provides contrasting evidence with regard to this proposition. We, therefore, conjecture in Chapter 5 that the stronger identification with one’s own country in a VSC may be a promising explanation for the smaller distance that is de- scribed by Alesina and Spolaore (1997).


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