SITE Working Paper Series,
Stockholm School of Economics, Stockholm Institute of Transition Economics

Abstract: We use a novel approach to address the question of whether a union of sovereign countries can efficiently raise and allocate a budget, even when members are purely self-interested and participation is voluntary. The main innovation of our model is to explore the link between budget contributions and allocation that arises when countries bargain over union outcomes. This link stems from the distribution of bargaining power being endogenously determined. Generically, it follows that unstructured bargaining gives an inefficient result. We find, however, that efficiency is achieved with fully homogenous countries, and when countries have similar incomes and the union budget is small. Moreover, some redistribution arises endogenously, even though nations are purely self-interested and not forced to participate in the union. A larger union budget, however, entails a trade-off between equality and efficiency. We also analyze alternative institutions and find that majority rule can improve efficiency if nations who prefer projects with high public good spillovers are endogenously selected to the majority coalition. Exogenous tax rules, such as the linear tax rule in the EU, which is designed to increase efficiency on the contribution margin, can also improve overall efficiency despite decreasing the efficiency of the allocation of funds.

Keywords: International Unions; Efficiency; Public Goods; Redistribution; Federalism; Legislative Bargaining

JEL-codes: D71; H77; H87

42 pages, First version: December 10, 2012. Revised: December 11, 2012.

Full text files

hasite0020.pdf  Full text

Download statistics

• Stockholm School of Economics, Stockholm Institute of Transition Economics
• Ordering Working Papers
• Instructions for Authors
• Home page for this series

Questions (including download problems) about the papers in this series should be directed to Dominick Nilsson ()
Report other problems with accessing this service to Sune Karlsson ().

RePEc:hhs:hasite:0020This page generated on 2024-09-13 22:14:53.