The purpose of this paper is to explain the structure, stability, and performance of federalism, Mexican style. The principal features of federalism include: First, the state was dominated for 70 years by the hegemonic Revolutionary Party (PRI) that maintained monopoly control of all levels of government. Second, Mexico became a highly centralized state. Third, markets were heavily controlled by the central government. Fourth, this system has recently begun to breakdown, first with economic liberalization; and second with the PRI losing its monopoly hold on power. To explain these features of Mexican federalism, I draw on recent developments in positive political theory and the new institutionalism. Explaining the above features of Mexican federalism requires understanding the incentives of the hegemonic PRI. The PRI’s dominance of Mexico cannot be taken as given. Mutli-decade dominance is rare and reflects the maintenance of political cartel. Like economic cartels, political ones are difficult to maintain.