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Centralized Fiscal Spending by Supranational Unions

Author

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  • Jenny Simon
  • Justin Mattias Valasek

Abstract

We study fiscal spending by supranational unions, where participation is voluntary and countries bargain over contributions to and the allocation of a central budget. We explore the link between the allocation and nations’ contributions that occurs since bargaining power is endogenous, and generically causes inefficiency. 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.

Suggested Citation

  • Jenny Simon & Justin Mattias Valasek, 2013. "Centralized Fiscal Spending by Supranational Unions," CESifo Working Paper Series 4321, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_4321
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp4321.pdf
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    References listed on IDEAS

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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.
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    More about this item

    Keywords

    supranational unions; efficiency; public goods; redistribution; federalism; legislative bargaining;

    JEL classification:

    • 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

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