Working Paper: CEPR ID: DP2837
Authors: Klaus Wallner
Abstract: This Paper analyses a hold-up problem in the EU enlargement process. EU-specific anticipatory investments of private firms lower the governments outside option. The EU takes advantage of the applicants' increased dependency and extracts more surpluses through entrance conditions that benefit it and impose huge costs on applicants. If private firms pay less than the full entrance fee in taxes, enlargement immiserises the entrant. While in practice an applicant may possess sufficient bargaining power to avoid immiserisation, the hold-up problem reduces its potential gains from joining the EU. This result suggests that previous calculations, ignoring both the applicants' costs of joining the EU and the dynamics of their bargaining position during the negotiations, overestimate the welfare effects of membership.
Keywords: EU enlargement; holdup problems; sunk costs
JEL Codes: D71; F02; F15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Specific investments by firms (G31) | Decreased bargaining power of governments (F69) |
| Decreased bargaining power of governments (F69) | EU's ability to impose costly entrance conditions (F55) |
| Specific investments by firms (G31) | EU's ability to impose costly entrance conditions (F55) |
| Anticipation of EU membership (F55) | Decrease in applicant's outside option (J79) |
| Holdup problem (D86) | Immiserization of the entrants (F11) |
| Costs of membership (J32) | Potential benefits of membership (J50) |