Anticipatory Specific Investments and the EU Enlargement Negotiations

Abstract

If future negotiations for entry into the EU are anticipated by a decentralized business sector in transition economies, this may trigger EU-specific irreversible investments, reducing the bargaining position of an applicant country in the actual negotiations. As a result the country may face stiffer terms of entry and end up worse off than without the ex ante possibility of enlargement, even though ex post it may be optimal to join anyway. In this case it is shown that if the country cannot fully tax the private producers, a nationalized investment sector does better than a privatized one for the applicant country, allowing the government to avoid specific investments and thus preserving its bargaining position. This model develops strong policy implication for the accession process.

JEL Classification: F15, D71, F02