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Efficient Fiscal Spending by Supranational Unions

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  • Jenny Simon

    ()
    (Stockholm Institute of Transition Economics and CESifo)

  • Justin M. Valasek

    ()
    (WZB Berlin)

Abstract

We study fiscal spending by supranational unions, where participation is voluntary and countries bargain over contributions to and the allocation of a central budget. We establish and explore the link between the budget's allocation and nations' contributions that occurs since bargaining power is endogenous, and a country's outside option during budget negotiations is to withdraw its contribution and consume its full income. Generically, it follows that unstructured bargaining gives an inefficient result in the presence of income asymmetry between member nations. Interestingly, redistribution arises endogenously, despite nations being purely self-interested. However, there exists a trade-off between increasing equality and decreasing efficiency, which becomes more severe as the centralized budget increases. We also analyze partial ex-ante commitment through alternative decision-making institutions: Both majority rule and exogenous tax rules can improve efficiency.

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Bibliographic Info

Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 183.

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Length: 57
Date of creation: 10 Jun 2013
Date of revision:
Handle: RePEc:onb:oenbwp:183

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Related research

Keywords: Supranational Unions; Efficiency; Public Goods; Redistribution; Federalism; Legislative Bargaining;

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  1. Lin Zhou, 1997. "The Nash Bargaining Theory with Non-Convex Problems," Econometrica, Econometric Society, vol. 65(3), pages 681-686, May.
  2. Besley, Timothy & Coate, Stephen, 2003. "Centralized versus decentralized provision of local public goods: a political economy approach," Journal of Public Economics, Elsevier, vol. 87(12), pages 2611-2637, December.
  3. Conley, John P. & Wilkie, Simon, 1996. "An Extension of the Nash Bargaining Solution to Nonconvex Problems," Games and Economic Behavior, Elsevier, vol. 13(1), pages 26-38, March.
  4. Herrero, Maria Jose, 1989. "The nash program: Non-convex bargaining problems," Journal of Economic Theory, Elsevier, vol. 49(2), pages 266-277, December.
  5. Philippe Aghion & Patrick Bolton, 2003. "Incomplete Social Contracts," Journal of the European Economic Association, MIT Press, vol. 1(1), pages 38-67, 03.
  6. Giovanni Maggi & Massimo Morelli, 2006. "Self-Enforcing Voting in International Organizations," American Economic Review, American Economic Association, vol. 96(4), pages 1137-1158, September.
  7. Ben Lockwood, 2002. "Distributive Politics and the Costs of Centralization," Review of Economic Studies, Oxford University Press, vol. 69(2), pages 313-337.
  8. B�rd Harstad, 2005. "Majority Rules and Incentives," The Quarterly Journal of Economics, MIT Press, vol. 120(4), pages 1535-1568, November.
  9. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
  10. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
  11. Bård Harstad, 2007. "Harmonization and Side Payments in Political Cooperation," American Economic Review, American Economic Association, vol. 97(3), pages 871-889, June.
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