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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)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.97.3.871
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 97 (2007)
Issue (Month): 3 (June)
Pages: 871-889

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Handle: RePEc:aea:aecrev:v:97:y:2007:i:3:p:871-889
Note: DOI: 10.1257/aer.97.3.871
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Keywords:

Find related papers by 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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  1. Ben Lockwood, 2002. "Distributive Politics and the Costs of Centralization," Review of Economic Studies, Oxford University Press, vol. 69(2), pages 313-337.
  2. Wilson, Robert B, 1985. "Incentive Efficiency of Double Auctions," Econometrica, Econometric Society, vol. 53(5), pages 1101-15, September.
  3. Jean Hindriks & Ben Lockwood, 2005. "Decentralization and Electoral Accountability: Incentives, Separation, and Voter Welfare," Working Papers 2006-02, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
  4. Peter C. Cramton, 1992. "Strategic Delay in Bargaining with Two-Sided Uncertainty," Review of Economic Studies, Oxford University Press, vol. 59(1), pages 205-225.
  5. Alesina, Alberto F & Angeloni, Ignazio & Etro, Federico, 2003. "International Unions," CEPR Discussion Papers 3913, C.E.P.R. Discussion Papers.
  6. Koleman S. Strumpf & Felix Oberholzer-Gee, 2002. "Endogenous Policy Decentralization: Testing the Central Tenet of Economic Federalism," Journal of Political Economy, University of Chicago Press, vol. 110(1), pages 1-36, February.
  7. Loeper, Antoine, 2011. "Coordination in heterogeneous federal systems," Journal of Public Economics, Elsevier, vol. 95(7), pages 900-912.
  8. Alberto Alesina & Allan Drazen, 1989. "Why are Stabilizations Delayed?," NBER Working Papers 3053, National Bureau of Economic Research, Inc.
  9. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
  10. Seabright, Paul, 1996. "Accountability and decentralisation in government: An incomplete contracts model," European Economic Review, Elsevier, vol. 40(1), pages 61-89, January.
  11. Inderst, Roman, 1998. "Multi-Issue Bargaining with Endogenous Agenda," Sonderforschungsbereich 504 Publications 98-35, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  12. Wallace E. Oates, 1999. "An Essay on Fiscal Federalism," Journal of Economic Literature, American Economic Association, vol. 37(3), pages 1120-1149, September.
  13. Matthias Wrede, 2006. "Uniformity Requirement and Political Accountability," Journal of Economics, Springer, vol. 89(2), pages 95-113, November.
  14. David Kreps & Robert Wilson, 1998. "Sequential Equilibria," Levine's Working Paper Archive 237, David K. Levine.
  15. 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.
  16. Bolton, Patrick & Farrell, Joseph, 1990. "Decentralization, Duplication, and Delay," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 803-26, August.
  17. Lockwood, Ben, 2005. "Fiscal Decentralization: A Political Economy Perspective," The Warwick Economics Research Paper Series (TWERPS) 721, University of Warwick, Department of Economics.
  18. Barrett, Scott, 2001. "International cooperation for sale," European Economic Review, Elsevier, vol. 45(10), pages 1835-1850, December.
  19. Anat R. Admati & Motty Perry, 1987. "Strategic Delay in Bargaining," Review of Economic Studies, Oxford University Press, vol. 54(3), pages 345-364.
  20. Michael Hoel, 1992. "International environment conventions: The case of uniform reductions of emissions," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 2(2), pages 141-159, March.
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