Working Paper: NBER ID: w8645
Authors: Alberto Alesina; Ignazio Angeloni; Federico Etro
Abstract: We model an international union as a group of countries deciding together the provision of certain public goods and policies because of spillovers. The countries are heterogeneous either in preferences and/or in economic fundamentals. The trade off between the benefits of coordination and the loss of independent policymaking endogenously determines the size, the composition and the scope of unions. Our model implies that the equilibrium size of the union is inversely related to the degree of heterogeneity between countries and to the spectrum of common policies. Hence, there is a trade off between enlargement and deepening of coordination: a union involved in too many collateral activities will be favored by few countries, while a union which focuses on a core of activities will be favored by many countries. However the political equilibrium implies a bias toward excessive centralization and small size of the union. This bias can be corrected if there is a constitutional commitment of the union to centralize only certain policies.
Keywords: No keywords provided
JEL Codes: F2; F42; H73; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Degree of heterogeneity (C46) | Equilibrium size of the union (C62) |
| Heterogeneity decreases (F12) | Size of the union increases (J51) |
| Number of policies centralized (H77) | Size of the union (J51) |
| Centralization of many policies (H77) | Smaller size of the union (J51) |
| Centralization of fewer policies (H77) | Larger size of the union (J51) |
| Constitutional commitment to limit centralization (H77) | Correct bias toward excessive centralization and small size (D72) |
| Expansion of union's prerogatives post-formation (J58) | Deterrence of initial membership (D71) |
| New members with similar preferences (C92) | Maintenance of status quo (C62) |