The core of a federal system is to provide a stable structure of decentralization. In Brazil, there has been sequential periods of decentralization and centralization with impacts on the country's economic performance. The most recent literature predicts problems of incentives in both centralization and decentralization, called the twin dilemma of federalism. Specifically, three conditions are necessary to solve this structural dilemma and have the market-preserving federalism type: (i) subnational governments autonomy in tax and supply public goods (fiscal decentralization); however, (ii) they must face hard budget constraints, which means that they must bear all the consequences of their fiscal policies; and (iii) a common market is ensured in the national territory. To teste this for Brazil an applied general equilibrium model was constructed to represent the Brazilian 2011 economic environment under a decentralized institutional structure would simulate the implementation of fiscal decentralization disciplined by hard budget constraint and factors mobility. The mains results confirmed the hypothesis that the Brazilian economy will increase its economic performance, measured by the GDP and welfare of families, although there have been losses in the North and Northeast regions.