Working Paper: CEPR ID: DP337
Authors: Konstantine Gatsios; Larry Karp
Abstract: We study a model in which a customs union trades with countries that behaved strategically. If the members of the customs union are similar but not identical, one country will want to delegate authority for making union policy to its partner. Even if side-payments within the union are permitted, union welfare may be higher if one country chooses union policy to maximize its own welfare, rather than having a supra-national agent choosing union policy to maximize joint welfare. The delegation decision depends on whether the policies used by union and non-union countries are strategic substitutes or complements and on which union member is more "aggressive".
Keywords: customs unions; delegation decisions; strategic complements; strategic substitutes
JEL Codes: 410; 420
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| production costs (D24) | degree of aggression in policy-making (D74) |
| similarity among customs union members (F15) | delegation to one member (D70) |
| delegation to one member (D70) | joint welfare (I39) |
| degree of aggression in policy-making (D74) | delegation decision (D70) |
| strategic nature of policies (E60) | delegation decision (D70) |
| production costs (D24) | choice of policy-maker (D72) |