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Harmonization and Side Payments in Political Cooperation

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  • Bård Harstad

Abstract

For two districts or countries that try to internalize externalities, I analyze a bargaining game under private information. I derive conditions for when it is efficient with uniform policies across regions—with and without side payments— and when it is efficient to prohibit side payments in the negotiations. While policy differentiation and side payments allow the policy to better reflect local conditions, they create conflicts between the regions and, thus, delay. The results also describe when political centralization outperforms decentralized cooperation, and they provide a theoretical foundation for the controversial "uniformity assumption" traditionally used by the fiscal federalism literature. (JEL C78, D72, D82, H77)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 97 (2007)
Issue (Month): 3 (June)
Pages: 871-889

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Handle: RePEc:aea:aecrev:v:97:y:2007:i:3:p:871-889

Note: DOI: 10.1257/aer.97.3.871
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  1. Ben Lockwood, 2002. "Distributive Politics and the Costs of Centralization," Review of Economic Studies, Oxford University Press, vol. 69(2), pages 313-337.
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  14. Lockwood, Ben, 2005. "Fiscal Decentralization: A Political Economy Perspective," The Warwick Economics Research Paper Series (TWERPS) 721, University of Warwick, Department of Economics.
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  18. Peter Cramton, 1992. "Strategic Delay in Bargaining with Two-Sided Uncertainty," Papers of Peter Cramton 92res, University of Maryland, Department of Economics - Peter Cramton, revised 09 Jun 1998.
  19. Wallace E. Oates, 1999. "An Essay on Fiscal Federalism," Journal of Economic Literature, American Economic Association, vol. 37(3), pages 1120-1149, September.
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