The interest in, and the appeal of, fiscal federalism and fiscal
decentralization have been increasing in recent years. At the same time many mature federations continue to evolve towards greater centralization, as Australia has evolved in the last one hundred years. The reasons for the evolution of fiscal federalism towards greater centralization remain unclear, and the traditional theories of fiscal federalism shed little light on the factors that might be important
in this process. This paper suggests that the insight yielded by the new institutional
economics - that the motivations and incentives of economic agents, and the options
available to them, are influenced in a fundamental sense by the incompleteness of
contracts - may throw considerable light on the evolution of federalism in Australia
over the past one hundred years.