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Efficient fiscal spending by supranational unions

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  • Simon, Jenny
  • Valasek, Justin Mattias

Abstract

We use a novel approach to address the question of whether a union of sovereign countries can efficiently raise and allocate a budget, even when members are purely self-interested and participation is voluntary. The main innovation of our model is to explore the link between budget contributions and allocation that arises when countries bargain over union outcomes. This link stems from the distribution of bargaining power being endogenously determined. Generically, it follows that unstructured bargaining gives an inefficient result. We find, however, that efficiency is achieved with fully homogenous countries, and when countries have similar incomes and the union budget is small. Moreover, some redistribution arises endogenously, even though nations are purely self-interested and not forced to participate in the union. A larger union budget, however, entails a tradeoff between equality and efficiency. We also analyze alternative institutions and find that majority rule can improve efficiency if nations who prefer projects with high public good spillovers are endogenously selected to the majority coalition. Exogenous tax rules, such as the linear tax rule in the EU, which is designed to increase efficiency on the contribution margin, can also improve overall efficiency despite decreasing the efficiency of the allocation of funds. -- Wir nutzen einen neuen Ansatz um der Frage nachzugehen, ob eine Union aus souveränen Staaten effizient ein Budget erheben und verteilen kann, auch wenn alle Mitgliedstaaten ausschließlich ihren Eigennutzen maximieren und die Mitgliedschaft freiwillig ist. Die Hauptneuerung unseres Modells ist die Erforschung des Zusammenhanges zwischen Beiträgen zum gemeinsamen Budget einerseits und dessen Allokation andererseits, der aus dem Verhandlungsprozess resultiert. Dieser Zusammenhang entsteht, da die Verteilung relativer Verhandlungsmacht endogen ist. Das bewirkt, dass ein unstrukturierter Verhandlungsprozess fast immer zu ineffizienten Resultaten führt. Ausnahmen ergeben sich wenn alle Staaten homogen sind, sowie wenn die nationalen Einkommen ähnlich und das gemeinsame Unionsbudget vergleichsweise gering sind. Darüber hinaus zeigen wir, dass ein gewisses Maß an Umverteilung entsteht, obwohl alle Staaten ausschließlich eigennützig handeln und freiwillig teilnehmen. Mit einem wachsenden Budget ergibt sich allerdings ein Konflikt zwischen Gleichheit und Effizienz. Desweiteren analysieren wir alternative Institutionen und zeigen dass ein Mehrheitsprinzip effizienzsteigernd sein kann, sofern die Staaten welche Projekte mit dem höchsten Gemeinnutzen bevorzugen eine Mehrheitskoalition bilden. Exogen bestimmte Beitragssätze, wie etwa die proportionale Steuerregel in der EU, welche zur Steigerung der Effizienz auf der Abgabeseite eingeführt wurde, können ebenfalls insgesamt vorteilhaft sein, obwohl gleichzeitig die Effizienz der resultierenden Mittelverteilung sinkt.

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Bibliographic Info

Paper provided by Social Science Research Center Berlin (WZB) in its series Discussion Papers, Research Unit: Economics of Change with number SP II 2012-305.

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Date of creation: 2012
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Handle: RePEc:zbw:wzbeoc:spii2012305

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

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  1. 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.
  2. Herrero, Maria Jose, 1989. "The nash program: Non-convex bargaining problems," Journal of Economic Theory, Elsevier, vol. 49(2), pages 266-277, December.
  3. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
  4. Ben Lockwood, 2002. "Distributive Politics and the Costs of Centralization," Review of Economic Studies, Oxford University Press, vol. 69(2), pages 313-337.
  5. Lin Zhou, 1997. "The Nash Bargaining Theory with Non-Convex Problems," Econometrica, Econometric Society, vol. 65(3), pages 681-686, May.
  6. Giovanni Maggi & Massimo Morelli, 2003. "Self Enforcing Voting in International Organizations," NBER Working Papers 10102, National Bureau of Economic Research, Inc.
  7. Aghion, Philippe & Bolton, Patrick, 2003. "Incomplete Social Contracts," Scholarly Articles 4554123, Harvard University Department of Economics.
  8. Bård Harstad, 2007. "Harmonization and Side Payments in Political Cooperation," American Economic Review, American Economic Association, vol. 97(3), pages 871-889, June.
  9. B�rd Harstad, 2005. "Majority Rules and Incentives," The Quarterly Journal of Economics, MIT Press, vol. 120(4), pages 1535-1568, November.
  10. 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.
  11. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
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