My dissertation introduces a new, positive theory of federalism that explains that the divergence of institutional and individual interests is an important cause of instability in federal systems. This is because, when the interests of state institutions and individual politicians differ, rational, self-interested politicians will pursue their individual interests at their states’ expense. My dissertation then applies this theory to the United States. I use two qualitative case studies, education and crime control, to show why this “interest gap” between states and state politicians developed, and further, how the short sighted, self-interested decision-making of state actors contributed to American federalism’s decline.