Enlargement versus Deepening: The Trade-Off Facing Economic Unions

26 Pages Posted: 12 Nov 2008

See all articles by Oliver Lorz

Oliver Lorz

RWTH Aachen University

Gerald Willmann

Bielefeld University; IfW Kiel; KU Leuven; CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: November 1, 2008

Abstract

This paper analyzes the relationship between the size of an economic union and the degree of policy centralization. We consider a political economy setting in which elected representatives bargain about the degree of centralization within the union. In our model strategic delegation affects the identity of the representatives and hence the equilibrium policy outcome. We show that the relationship between the size of the union and centralization may be non-monotonic: Up to a certain size of the union enlargement leads to deeper integration, whereas beyond that size further enlargement implies less centralization. We also show that freezing the level of centralization or allowing an associated membership can mitigate the trade-off.

Keywords: fiscal federalism, policy centralization, political economy

JEL Classification: D78, H77, H87

Suggested Citation

Lorz, Oliver and Willmann, Gerald, Enlargement versus Deepening: The Trade-Off Facing Economic Unions (November 1, 2008). CESifo Working Paper Series No. 2455, Available at SSRN: https://ssrn.com/abstract=1299545

Oliver Lorz

RWTH Aachen University ( email )

Templergraben 55
D-52056 Aachen, 52056
Germany

Gerald Willmann (Contact Author)

Bielefeld University ( email )

Universit├Ątsstra├če 25
Bielefeld, NRW 33613
Germany

IfW Kiel ( email )

P.O. Box 4309
Kiel, Schleswig-Hosltein D-24100
Germany

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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