| Summary: | Under the ‘new normal’ in the labor market, individuals can work remotely or in person, a hybrid work mode that became ubiquitous during the pandemic. This paper studies the efficiency of decentralized leadership in federations in which hybrid work is the modus operandi. Self-interested regional governments and a benevolent central government interact strategically in dynamic games in which there are provisions of federal and regional public goods and interregional income and fiscal transfers, the population is attached to regions and hybrid work creates a common labor market in the federation. In this setting, we first show that decentralized leadership is inefficient if the center controls income transfers only. This result provides an efficiency enhancing motivation for the center to additionally control earmarked transfers: we demonstrate that decentralized leadership is efficient whenever the center controls both income and earmarked transfers. However, this is not the only federal regime in which decentralized leadership is efficient. It is efficient in the absence of earmarked transfers if it is appropriately selective: when the regional governments commit to the provision of the federal public only and the center redistributes income across regions.
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