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German Working Papers in Law and Economics
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Volume 2008

AUTHOR:
Vikas Kumar

TITLE:
Negotiating Constitution for Political Unions

SUGGESTED CITATION:
Vikas Kumar (2008) "Negotiating Constitution for Political Unions", German Working Papers in Law and Economics: Vol. 2008: Article 11.
http://www.bepress.com/gwp/default/vol2008/iss1/art11


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ABSTRACT:

This paper provides a cradle-to-grave model for political union between two independent states. We show that in equilibrium merger agreement is path dependent and, in some cases, time inconsistent. We introduce negotiated, contested, and time-consistent constitutions, each addressing a larger class of merger problems. The possibility of contest constrains the set of optimal taxes and more importantly it enhances the stability of constitution. Ethnic and economic heterogeneity constrain the set of mutually desirable mergers, which in extreme cases could rule out merger altogether. Intra-state economic heterogeneity is shown to be more constraining than other forms of heterogeneity. We also show that the rent extracted by technologically advanced province in a union for transferring technology to the backward province is not only increasing in complexity of technology but also bounded from above.




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