Integration of Asymmetric Nations
28 Pages Posted: 23 Aug 2010
Date Written: February 22, 2010
We examine the incentives for integration between two nations of different sizes in a set up similar to that used by 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 analyze integration where each country gives up its sovereignty and there is a joint decision about the location of the new nation's capital. We find that integration occurs if the size differences are below a certain threshold. After integration, a new capital is built (in the most efficient location) if the costs of relocating the capital are not too high. The results are robust in a number of plausible decision-making scenarios. Either country can be the major beneficiary, depending on transport and capital maintenance costs.
Keywords: Size of Nations, Integration, Asymmetry, Spatial Public Goods
JEL Classification: C70, H40, L30, R53
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