DP17883 International Unions and Integration
We consider a model of international unions in which countries have heterogeneous preferences for integration, and their integration decisions are strategic complements. We analyze equilibrium under several integration protocols that differ in the flexibility countries have in choosing how much to integrate. Unlike previous models with strategic substitutes, our results are in line with the evolution of the European Union (EU), where enlargement and flexible integration coincide with enhanced integration and are often spearheaded by the "core" countries. Moreover, when non-members (candidates, exiting countries, and other nations) can partially integrate with the union, as in practice, restrictions on their integration determine the union's size and scope and are necessary for fostering cooperation. Motivated by Brexit and the rise of euro-skepticism, we allow countries to leave the union and demonstrate how restrictions on the integration of leaving countries make the union robust to changes in members' preferences.
