Efficient Fiscal Spending by Supranational Unions
AbstractWe 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 InfoPaper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 183.
Date of creation: 10 Jun 2013
Date of revision:
Postal: Oesterreichische Nationalbank, Economic Studies Division, c/o Beate Hofbauer-Berlakovich, POB 61, A-1011 Vienna, Austria
Other versions of this item:
- Simon, Jenny & Valasek, Justin, 2012. "Efficient Fiscal Spending by Supranational Unions," SITE Working Paper Series 20, Stockholm Institute of Transition Economics, Stockholm School of Economics, revised 11 Dec 2012.
- Simon, Jenny & Valasek, Justin Mattias, 2012. "Efficient fiscal spending by supranational unions," Discussion Papers, Research Unit: Economics of Change SP II 2012-305, Social Science Research Center Berlin (WZB).
- H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
- H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
- D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-09-06 (All new papers)
- NEP-CDM-2013-09-06 (Collective Decision-Making)
- NEP-PBE-2013-09-06 (Public Economics)
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