International Tax and Public Finance

, Volume 20, Issue 2, pp 247–267 | Cite as

Size versus scope: on the trade-off facing economic unions

Article

Abstract

This paper analyzes the relationship between the size of an economic union and the degree of policy centralization. We consider a political economy setting in which elected representatives bargain over the degree of centralization within the union. In our model, strategic delegation affects the identity of the representatives, and hence the equilibrium policy outcome. We show that the relationship between the extensive and the intensive margin of centralization may be non-monotonic: Up to a certain threshold a larger size implies deeper integration, whereas beyond that threshold centralization declines with further increases in size. We also show that freezing the level of centralization and associate memberships can mitigate this trade-off.

Keywords

Fiscal federalism Policy centralization Political economy 

JEL Classification

D78 H77 H87 

Notes

Acknowledgements

We would like to thank Ansgar Belke, Emily Blanchard, Hartmut Egger, Steffen Minter, Stefan Napel, Otto Reich, and seminar participants at the Ifo Political Economy Workshop, the VfS-AWTP Meeting, the IIPF Annual Conference, and Universities of Bayreuth, Deakin, Elon, Massey, Monash, Tübingen, and Virginia. We are also grateful to two anonymous referees for their helpful comments. The usual disclaimer applies. All errors are ours.

References

  1. Alesina, A., & Spolaore, E. (1997). On the number and size of nations. Quarterly Journal of Economics, 112, 1027–1056. CrossRefGoogle Scholar
  2. Alesina, A., & Spolaore, E. (2003). The size of nations. Cambridge: MIT Press. Google Scholar
  3. Alesina, A., Angeloni, I., & Etro, F. (2005). International unions. American Economic Review, 95, 602–615. CrossRefGoogle Scholar
  4. Berglöf, E., Burkhart, M., Friebel, G., & Paltseva, E. (2008). Widening and deepening: reforming the European Union. American Economic Review: Papers and Proceedings, 98, 133–137. CrossRefGoogle Scholar
  5. Besley, T., & Coate, S. (2003). Centralized versus decentralized provision of local public goods: a political economy approach. Journal of Public Economics, 87, 2611–2637. CrossRefGoogle Scholar
  6. Buchholz, W., Haupt, A., & Peters, W. (2005). International environmental agreements and strategic voting. The Scandinavian Journal of Economics, 107, 175–195. CrossRefGoogle Scholar
  7. Chari, V., Jones, L. E., & Marimon, R. (1997). The economics of split-ticket voting in representative democracies. American Economic Review, 87, 957–976. Google Scholar
  8. Cheikbossian, G. (2000). Federalism, distributive politics and representative democracy. Economics of Governance, 1, 105–122. CrossRefGoogle Scholar
  9. Cheikbossian, G. (2008). Rent-seeking, spillovers and the benefits of decentralization. Journal of Urban Economics, 63, 217–228. CrossRefGoogle Scholar
  10. Crémer, J., & Palfrey, T. R. (1996). In or out?: Centralization by majority vote. European Economic Review, 40, 43–60. CrossRefGoogle Scholar
  11. Crémer, J., & Palfrey, T. R. (2000). Federal mandates by popular demand. Journal of Political Economy, 108, 905–927. CrossRefGoogle Scholar
  12. Desmet, K., Breton, M. L., Ortuo, I., & Weber, S. (2011). The stability and breakup of nations: a quantitative analysis. Journal of Economic Growth, 16, 183–213. CrossRefGoogle Scholar
  13. Dur, R. A., & Roelfsema, H. J. (2005). Why does centralisation fail to internalise policy externalities? Public Choice, 122, 395–416. CrossRefGoogle Scholar
  14. Ferretti, G. M. M., & Perotti, R. (2002). Electoral systems and public spending. Quarterly Journal of Economics, 117(2), 609–657. CrossRefGoogle Scholar
  15. Gans, J. S., & Smart, M. (1996). Majority voting with single-crossing preferences. Journal of Public Economics, 59, 219–237. CrossRefGoogle Scholar
  16. Harstad, B. (2007). Harmonization and side-payments in political cooperation. The American Economic Review, 97(3), 871–889. CrossRefGoogle Scholar
  17. Harstad, B. (2008). Electoral systems and public spending. Journal of the European Economic Association, 6(2/3), 468–477. CrossRefGoogle Scholar
  18. Harstad, B. (2010). Strategic delegation and voting rules. Journal of Public Economics, 94(1–2), 102–113. CrossRefGoogle Scholar
  19. Hoyt, W. H. (1991). Property taxation, Nash equilibrium, and market power. Journal of Urban Economics, 34, 123–131. CrossRefGoogle Scholar
  20. Janeba, E., & Wilson, J. D. (2005). Decentralization and international tax competition. Journal of Public Economics, 89, 1211–1229. CrossRefGoogle Scholar
  21. Janeba, E., & Wilson, J. D. (2011). Optimal fiscal federalism in the presence of tax competition. Journal of Public Economics, 95, 1302–1311. CrossRefGoogle Scholar
  22. Lockwood, B. (2002). Distributive policies and the costs of centralization. Review of Economic Studies, 69, 313–337. CrossRefGoogle Scholar
  23. Lockwood, B. (2006). Fiscal decentralization: a political economy perspective. In E. Ahmad & G. Brosio (Eds.), Handbook of fiscal federalism. Google Scholar
  24. Lorz, O., & Willmann, G. (2005). On the endogenous allocation of decision powers in federal structures. Journal of Urban Economics, 57, 242–257. CrossRefGoogle Scholar
  25. Olofsgård, A. (2005). Secessions and political extremism: why regional referenda do not solve the problem. Journal of the European Economic Association, 2, 805–832. CrossRefGoogle Scholar
  26. Persson, T., & Tabellini, G. (1992). The politics of 1992: fiscal policy and European integration. Review of Economic Studies, 59, 689–701. CrossRefGoogle Scholar
  27. Redoano, M., & Scharf, K. A. (2004). The political economy of policy centralization: direct versus representative democracy. Journal of Public Economics, 88, 799–817. CrossRefGoogle Scholar
  28. Rota Graziosi, G. (2009). On the strategic use of strategic delegation in international agreements. Journal of Public Economic Theory, 11, 281–296. CrossRefGoogle Scholar
  29. Ruta, M. (2005). Economic theories of political (dis)integration. Journal of Economic Surveys, 19, 1–21. CrossRefGoogle Scholar
  30. Schneider, C. J. (2007). Enlargement processes and distributional conflicts: the politics of discriminatory membership in the European Union. Public Choice, 132, 85–102. CrossRefGoogle Scholar
  31. Segendorff, B. (1998). Delegation and threat in bargaining. Games and Economic Behavior, 23, 266–283. CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2012

Authors and Affiliations

  1. 1.School of Business and EconomicsRWTH Aachen UniversityAachenGermany
  2. 2.Department of EconomicsKU LeuvenLeuvenBelgium

Personalised recommendations