Federal systems are based on multi-level government that combines elements of self-rule and shared rule. This usually involves three levels of government. National (also called federal or central) government, regional government (also called state or provincial government) and local government.

There is much diversity among federal systems. In order to understand federalism, it is therefore, important to find common characteristics that all federal systems share. Five elements have characterized a federal state:

1. At least two levels of government exercise sovereignty over the same land and people.

2. Both the central government at the national level and the regional government at the subunit level possess a range of mutually exclusive powers (self-rule), which might include a measure of legislative and executive autonomy or fiscal independence.

3. A legal document provides that neither level can alter unilaterally the responsibilities and authority of each level of government.

4. National decision-making institutions include representatives from the subunit level, who might occupy a second chamber in the national legislature (shared rule).
5. The constitution provides an arbitration mechanism—whether a constitutional court or a referendum mechanism—that can resolve disputes between the federal center and the subunit level.

Reference: Foundations of Comparative Politics