Lobbying and (de)centralization

Abstract

This paper presents a positive theory of (de)centralization of policy decisions in an international union -defined as a supranational jurisdiction that may exercise a policy prerogative on behalf of member countries. I build a benchmark model where national lobbies can coordinate (i.e. form a trans-national lobby) at no cost and show that lobbying does not affect the fiscal regime. On the other hand, when interest groups cannot coordinate, decentralization emerges as a political equilibrium with lobbying. Policy centralization hurts national lobbies by increasing competition for influence. At a constitutional stage, interest groups induce politically motivated governments to reject centralization. Three extensions show that this result depends on the level of cross-border externalities; the voting rule at the constitutional stage; and the details of the institutional decision mechanism under centralization.