Widening Versus Deepening of International Unions

Abstract:     
The article provides a theoretical framework of international unions in the form of a two-stage game with discounting aimed at generating propositions about widening versus deepening in the integration process. Each player has a preference for a set of regulations. Regulatory differences between players cause utility loss. Harmonization reduces the utility loss but entails a cost since it requires union members to implement harmonized rules that may deviate from the player's preferred regulation. Insiders harmonize a subset of the regulations. Widening signifies that outsiders join the union by accepting the union's harmonized set of regulations - which is beneficial for the insiders. Deepening means that insiders proceed to harmonize a larger subset of regulations. We inquire whether widening should precede deepening, or vice versa, or whether it is preferable to interchange widening and deepening in some incrementally prescribed manner. The incentive to pursue further regulatory harmonization within a union increases with the regulatory diversity among insiders certeris paribus, provided the effect of outsiders on the utility of insiders is small. Insiders are more reluctant to opt for widening before deepening the more the mean regulatory preference of insiders deviates from the mean regulatory preference of outsiders in areas likely to become harmonized in the future. In contrast, members are more inclined to choose widening before deepening the more the mean regulatory preference of insiders deviates from the mean preference of outsiders in already harmonized areas.

Keywords: Widening, deepening, union, regulation, policy, harmonization, insiders, outsiders, two-stage game, political economy

JEL Classifications: C7, D6, D7, H4, H5, H11

Working Paper Series