Guillaume Cheikbossian

The New Geography of Eastern European Trade

This paper estimates the cost of the disintegration of the former Council for Mutual Economic Assistance (CMEA). It asks whether the reorientation of trade flows towards Western markets has been large enough to compensate for the huge destruction of trade flows between former CMEA countries. Given the severe recession and the reduction in export and import capacities, the answer to this question is not obvious. Furthermore, particular features of CMEA functioning imply that the decrease in regional trade flows is not necessarily welfare-increasing. Two gravity equations are estimated on a panel of 14 years to give a picture of CMEA trade before and after the disintegration. Trade reorientation from 1990 onwards and the penetration of foreign markets are assessed, and two conclusions emerge. First, despite the collapse of eastern trade, the increasing volume of trade flows with the West has not been large enough to compensate for the loss of regional markets. This is increasing, however, thanks to commercial policies which favour trade cooperation and liberalization. The contrast here between the 1990s and the 1920s, when a similar episode – the disintegration of the former Austro-Hungarian Empire – occurred, is striking. The second conclusion stresses the weakness of the regional market in the East, and the perverse effect of hub and spoke bilateralism, reinforced by the Europe Agreements. Similar regional eastern agreements have been signed as a result. They aim to limit the diverting effect of hub and spoke trade and to exploit the important potential seen to lie in the further development of eastern trade.

Federalism, distributive politics and representative democracy

Abstract. We analyze federal systems of government in which local public policies are financed by general taxation. In a decentralized political system there is, in each region, a vote to elect a local representative while in a centralized political system a single representative is elected by a federal vote. It is shown that under decentralization, voters strategically elect liberal representatives so as to nullify any element of cooperation between representatives in the decision-making stage. Thus, there is a trade-off between the budgetary externality and a “policy closer to the people”, but the democratic choice is biased towards decentralization.

The Collective Action Problem: Within-group Cooperation and Between-group Competition in a Repeated Rent-Seeking Game

This paper analyzes the ability of group members to cooperate in rent-seeking activities in a context of between-group competition. For this purpose, we develop an infinitely repeated rent-seeking game between two groups of different size. We first investigate Nash reversion strategies to support cooperative behavior in both groups, before analyzing double-edge trigger strategies which support cooperation in one group only. These last strategies have the property that cheating on the agreement in the cooperative group is followed by non-cooperation in this group and cooperation in the rival group. The main conclusion is that the set of parameters for which cooperation can be sustained within the larger group as a subgame perfect outcome is as large as that for which cooperation can be sustained in the smaller group. Hence, in contrast to Olsonʼs (1965) celebrated thesis, but in accordance with many informal and formal observations, larger groups can be as effective as smaller groups in furthering their interests.

When a Monetary Union Fails: A Parable

The political imperative is an important driving force behind the dissolution of monetary unions. But economic factors are also likely to play an important role. Using a two-country model of government finance in a common currency area, we suggest that when countries are very heterogeneous in terms of financing requirements or in terms of tolerance for inflation, one of them will benefit from achieving monetary independence. The results are contrasted to the breakup of the Austro-Hungarian crown area in the 1920s and especially to that of the ruble area in the 1990s.

Why is Law Enforcement Decentralized

Law enforcement is decentralized. It is so despite documented interjurisdictional externalities which would justify its centralization. To explain this fact, we construct a political economy model of law enforcement. Under decentralization, law enforcement in each region is in accord with the preferences of regional citizens, but interjurisdictional externalities are neglected. Under centralization, law enforcement for all regions is chosen by a legislature of regional representatives which may take externalities into account. However, the majority rule applies for decisions made by the central legislature and this implies that the allocation of enforcement resources may be skewed in favour of those who belong to the required majority. We show that the choice between centralization and decentralization depends on the technology of law enforcement and the nature of the interjurisdictional externalities.

Lobbying and Rent-Seeking for Public Goods in a Fiscally Centralized system

We analyze a centralized system as one in which a political authority finances by general taxation two local public goods each one associated with a particular region. Because individuals in the two regions have different preferences, they engage in rent-seeking activities to influence centralized policy-making in their preferred direction. Several results emerge from the analysis and in particular rent-seeking is shown to be increasing in taste heterogeneity and in the degree of spillovers.

The Political Economy of (De)centralization with Complementary Public Goods

This paper provides a political economy analysis of (de)centralization when local public goods—with spillovers effects—can be substitutes or complements. Depending on the degree of complementarity between local public goods, median voters strategically delegate policy to either ‘conservative’ or to ‘liberal’ representatives under decentralized decision-making. In the first case, it accentuates the free-rider problem in public good provision, while it mitigates it in the second case. Under centralized decision-making, the process of strategic delegation results in either too low or too much public spending, with the outcome crucially depending on the sharing of the costs of local public spending relative to the size of the spillover effects. Hence, with a common financing rule, centralization is welfare improving if and only if both public good externalities and the degree of complementarity between local public goods are both relatively large.

Dynamic Cooperation in Local Public Goods Supply with Imperfect Monitoring

This paper develops a two-country model where each country invests in a local public good generating positive cross-countries externalities. In a repeated game setting where the level of public good depends on a non-observable effort by each country plus a random shock, we characterize the existence condition of a cut-off trigger strategy equilibrium inducing full cooperation. Moreover, we show that introducing a small positive correlation between the two country-specific shocks gives rise to a manipulation of information thereby restricting the prospects of cooperation.

On the Difficulty of Collusion in the Presence of a More Efficient Outsider

We study the ability of several identical firms to collude in the presence of a more efficient firm, which does not take part in their collusive agreement. The cartel firms adopt stick-and-carrot strategies, while the efficient firm plays its one-period best-response function, regardless of the history of play. We characterize the most collusive symmetric punishment, which maximizes the scope for collusion. We then find that either a lower cost disadvantage or a smaller cartel size facilitates collusion. Finally, we compare our results with those obtained in the standard setup where all firms participate in the collusive agreement.