In theory, federal states establish a clear division of competences among government levels, with constitutions outlining the distribution of tasks, key institutions, and cooperation rules. These divisions limit state power and aim to enhance the efficiency of public goods supply by accommodating regional preferences and fostering competition among jurisdictions. However, in practice, federal systems often deviate from this ideal separation, characterized by extensive formal and informal cooperation in decision-making and public goods provision. The central state frequently engages in the delivery of public goods, influencing subnational policy initiatives through various federal mechanisms. This involvement can create a vertical imbalance, as subnational units may lack equivalent influence over the central government's initiatives. Vertical influences are often indirect, impacting general economic policies like price levels and inflation, but can also be direct, especially when specific responsibilities are transferred and detailed regulations for public goods provision are established. In some federations, such as Canada, the central government may intervene directly with local governments, bypassing provincial levels through financial transfers. Conversely, Germany has amended its federal Constitution to limit such central interventions.
