We study the use of partial decentralization as a way to avoid wasteful secessionist conflict in the presence of income disparities between regions, preference heterogeneity, and cultural diversity. While heterogeneity in terms of preferences relates to the fact that individuals in different regions have different preferences regarding a public good, cultural diversity relates to the fact that individuals bear a cost from interacting with people belonging to another region.

We assume that partial decentralization applies to both public expenditures and public revenues, hence it has both efficiency and distributional effects. More specifically, partial decentralization brings the government “closer to the people”, while exacerbating interregional income inequality to some extent.

We show that, even though an increase in inequality fuels conflict in both regions, the probability of a successful secession might be either increasing or decreasing in inequality, depending on whether unifying or seceding is socially efficient. If the cost of diversity decreases proportionally with decentralization, there always exists a range of decentralization levels such that the conflict can be avoided. We show that this range always gets larger with inequality, while the actual level of decentralization which is implemented in the shadow of conflict may be either increasing or decreasing in inequality. If the cost of diversity decreases less than proportionally with the decentralization level, partial decentralization cannot always serve as a conflict-mitigating strategy. Finally, we show that when decentralization is not a politically reversible process, it can never prevent a secessionist conflict.