Size versus scope: on the trade-off facing economic unions
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.
KeywordsFiscal federalism Policy centralization Political economy
JEL ClassificationD78 H77 H87
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.
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