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A Coalition-Formation Approach to Equilibrium Federations and Trading Blocs

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  • Burbidge, John B.
  • James A. DePater
  • Gordon M. Meyers
  • Abhijit Sengupta

Abstract

The authors develop a model in which states may choose to form coalitions to capture efficiency gains from policy coordination. Joining a coalition entails setting the policy variable to maximize the coalition's aggregate payoff at a Nash equilibrium against nonmembers and to commit to a transfer scheme to share the gains. With two states, the unique equilibrium structure is complete federation; with more than two states, incomplete federation can be the unique equilibrium. Interpreting this result in terms of custom unions, the trend to trading-bloc formation may be equilibrium behavior even with cooperation and transfers within customs unions. Copyright 1997 by American Economic Association.

Suggested Citation

  • Burbidge, John B. & James A. DePater & Gordon M. Meyers & Abhijit Sengupta, 1997. "A Coalition-Formation Approach to Equilibrium Federations and Trading Blocs," American Economic Review, American Economic Association, vol. 87(5), pages 940-956, December.
    • Handle: RePEc:aea:aecrev:v:87:y:1997:i:5:p:940-56
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    More about this item

    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations

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