I liked this old article by Alex Tabarrok, Arguments for Federalism. Tabarrok’s arguments are

  1. Districts form laboratories of democracy, where relatively low cost experiments can be run
  2. Districts can adopt different policies for diverse preferences
  3. Districts that most closely match an “area of effect” for some political decision are better because they reduce political externalities while still allowing for economies of scale
  4. Open borders between districts will preserve liberty through competition

Numbers 1 and 4 strike me as much stronger arguments than 2 or 3, but 4 needs to be more general. Districts with open borders compete on the overall quality of governance, not just liberty. Inter-district competition will pressure district governments to be relatively efficient and adopt productive policies. Indeed, I would think that they compete least of all on the issue of liberty, because liberty is usually most important a small minority.