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In this paper we consider a model of the country with heterogeneous population and examine compensation schemes that may prevent a threat of secession by dissatisfied regions. We show that horizontal imbalances are combatable with secession-proof compensation schemes that entail a degree of partial equalization: the disadvantageous regions should be subsidized but the burden on advantageous regions should not be too excessive. In the case of uniform distribution, we establish the 50-percent compensation rule for disadvantageous regions. Thus, we argue for a limited gap reduction between advantageous and disadvantageous regions and show that neither laissez faire nor Rawlsian allocation is secession-proof.

Infrastructure --- Macroeconomics --- Demography --- Taxation, Subsidies, and Revenue: General --- State and Local Government --- Intergovernmental Relations: Interjurisdictional Differentials and Their Effects --- Industry Studies: Transportation and Utilities: General --- Demographic Economics: General --- Aggregate Factor Income Distribution --- Population & demography --- Transportation --- Population and demographics --- Income inequality --- National accounts --- Saving and investment --- Population --- Income distribution --- Russian Federation

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