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Efficient Fiscal Spending by Supranational Unions

Author

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  • Jenny Simon

    () (Stockholm Institute of Transition Economics and CESifo)

  • Justin M. Valasek

    () (WZB Berlin)

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 establish and explore the link between the budget's allocation and nations' contributions that occurs since bargaining power is endogenous, and a country's outside option during budget negotiations is to withdraw its contribution and consume its full income. Generically, it follows that unstructured bargaining gives an inefficient result in the presence of income asymmetry between member nations. 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 M. Valasek, 2013. "Efficient Fiscal Spending by Supranational Unions," Working Papers 183, Oesterreichische Nationalbank (Austrian Central Bank).
  • Handle: RePEc:onb:oenbwp:183
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    References listed on IDEAS

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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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