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.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
8645.
Length: Date of creation: Dec 2001 Date of revision: Handle: RePEc:nbr:nberwo:8645
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Find related papers by JEL classification: F2 - International Economics - - International Factor Movements and International Business F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
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