Full and Federal Integration of Asymmetric Nations

Abstract

We examine the incentives for integration between two nations of different sizes in a set up similar to Alesina and Spolaore (2003): individuals are indexed by location, each nation (comprising of individuals) is an interval, and the public good in each nation is provided from its capital - located in the middle of the nation. We begin with an analysis of full integration, where upon integration, each country gives up its sovereignty and there is a joint decision about the location of the new nation's capital. Then, we extend our analysis to federated integration where each country maintains its capital but upon integration nations jointly decide a unique level of infrastructure provision (which lowers transportation costs). For both full as well as federated integration, a robust finding is that integration occurs if the size differences are smaller than a threshold. Despite this robust finding, there is a key difference between the two cases. Except when capital relocation is costly, the benefits of integration are larger for small nation in the full integration case while the opposite is true for the federated integration. Thus, while opposition to full scale integration might come from large nations, the opposition for federated integration might well come from smaller nations.

Keywords: Nations, Integration, Federation, Voting, Referendum, Location

JEL Classification: H00, R1, C7, D72