Harmonization and Side Payments in Political Cooperation

Abstract

For two districts or countries that try to internalize externalities, I analyze a bargaining game under private information. I derive conditions for when it is efficient with uniform policies across regions—with and without side payments— and when it is efficient to prohibit side payments in the negotiations. While policy differentiation and side payments allow the policy to better reflect local conditions, they create conflicts between the regions and, thus, delay. The results also describe when political centralization outperforms decentralized cooperation, and they provide a theoretical foundation for the controversial "uniformity assumption" traditionally used by the fiscal federalism literature. (JEL C78, D72, D82, H77)

On the Weights of Nations: Assigning Voting Weights in a Heterogeneous Union

“…See, e.g., Harstad (2004Harstad ( , 2005, who considers side payments and the ability to invest in projects; Casella (2005), who considers rules specifically designed for votes over sequences of decisions; and Jackson and Sonnenschein (forthcoming), who show that approximate efficiency can be obtained if multiple decisions can be bundled and voted over in a linked manner.…”

“…As a first (rough) approximation, we ignore these extra constraints in the discussion of the Constitution's proposed weights. As we shall see in the discussion following theorem 1, more complex voting systems can be optimal (see also Harstad [2005] for a rationalization of dual majority systems).…”

The architecture of federations: Constitutions, bargaining, and moral hazard

“…To our knowledge, the only other paper that explicitly studies political bargaining in decentralized settings is by Harstad (2006) and quite different in focus. The author considers a model where regions do not provide public inputs (investments) but have private information on their valuation of the project.…”

Gradualism and uncertainty in international union formation: The European Community’s first enlargement

“…The above theoretical bodies of work have recently spawned a fast-growing literature on the political economy of federalism, regional integration, and international unions (see for example Alesina et al 2001Alesina et al , 2005Alesina and Spolaore 2003;Baldwin 1999;Bolton and Roland 1997;Bordignon and Brusco 2006;Brou and Ruta 2006;Ellingsen 1998;Harstad 2007), which mainly consists of game-theoretic models studying the economic incentives of integration and/or secession (on secession see Bordignon and Brusco 2001) as well as the strategic determinants of country and union size, often yielding normative conclusions on constitutional design. 6 These papers take a non-generic approach to the specification of union benefits by modeling an international union as an efficient central provider of public goods, characterized by economies of scale and spillovers across union (and non-union) members, as in Alesina et al (2001Alesina et al ( , 2005.…”

“…7 In contrast to the emphasis of Alesina et al (2001Alesina et al ( , 2005 on the stability and size of equilibrium unions in light of public good spillovers, the focus of this paper is on the bargaining dynamics of the coalition-formation game and the strategic incentives inherent in negotiating the creation of an international union of countries. Harstad (2007) actually addresses the trade-off between strategic delay in the process of political centralization and the cost of policy uniformity using a similar signaling mechanism to the one below, albeit within a two-region framework, which implies that he does not consider the possibility of endogenous enlargement. Aghion et al (2007) employ an analogous dynamic bargaining framework in the context of international free trade agreements to model the choice of a 'leading country' between sequential and multilateral negotiations and how it depends on the structure of trade and protection.…”