The stability of federal systems is a thorny issue. Several scholars have attempted to come to grips with this problem and have proposed mechanisms or institutions which may contribute to the stabilization of federal systems. In many instances, however, the underlying mechanisms and micro-foundations are poorly specified. In this paper I build upon existing models dealing with decentralization and secession to incorporate unequal income distributions and externalities of public goods. Based on this some insights may be derived on the appropriate mechanisms to foster federal stability.