Integration and Regionalization - a political economic analysis

Working Paper, NUPI

This paper examines the incentives for political integration in a situation with a non-excludable public good. The model emphasizes inter-regional differences in sizes and preferences for the public good. In such a two-country model, Ellingsen (1998)1 characterizes the cases in which integration is an equilibrium. This paper includes a third region, and finds that a whole range of interesting and observable issues arise, which the two-country model is unable to capture. Depending on the relative differences in sizes and preferences among regions, the integration problem may be described as a prisoner’s dilemma, a coordination game or as a hawk-dove game. Multiple equilibria may exist as well as equilibria with no integration; partly integration; conditionally integration and exclusion from the coalition. The extreme case where the public good is global (beneficial to all) is discussed, as well as an extreme where it is local (beneficial only to the closest neighbors).