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Harmonization and Side Payments in Political Cooperation

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  • Bård Harstad

Abstract

For two districts or countries that try to internalize externalities, I analyze a bargaining game under private information. I derive conditions for when it is efficient with uniform policies across regions—with and without side payments— and when it is efficient to prohibit side payments in the negotiations. While policy differentiation and side payments allow the policy to better reflect local conditions, they create conflicts between the regions and, thus, delay. The results also describe when political centralization outperforms decentralized cooperation, and they provide a theoretical foundation for the controversial "uniformity assumption" traditionally used by the fiscal federalism literature. (JEL C78, D72, D82, H77)

Suggested Citation

  • Bård Harstad, 2007. "Harmonization and Side Payments in Political Cooperation," American Economic Review, American Economic Association, vol. 97(3), pages 871-889, June.
    • Handle: RePEc:aea:aecrev:v:97:y:2007:i:3:p:871-889
    DOI: 10.1257/aer.97.3.871
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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