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Recent research on federations, particularly in the developing world, emphasizes the importance of hard budget constraints and a strong central government to attenuate intergovernmental economic conflicts. Such research fails on two counts. First, it does not explain how hard budget constraints emerge or become self-enforcing. Second, it does not take into account the insight of the market-preserving federalism literature that central governments strong enough to impose restraint on regions are likely too powerful to be checked in a manner consistent with the longterm health of markets. Unfortunately, the market-preserving federalism literature itself provides little insight into how to move from a market-distorting to a market-preserving equilibrium. This article answers these theoretical shortcomings with reference to the evolution of political competition at the regional level and the representation of those regions at …