Is there room for convergence in the E.C.?
In this paper we develop a theoretical framework which makes it possible to analyze several aspects of convergence between E.C. countries. The analysis is done in a dynamic game context, where countries, apart from minimizing individual cost functions, minimize cooperatively a convergence function, which represents the convergence conditions as elaborated in the Maastricht Treaty in 1991. This aspect of convergence is modeled as a dynamic constraint on the individual cost functions. We show that if countries' own welfare is their primary interest (and convergence becomes secondary) the maximum degree of convergence is completely determined by the non-cooperative outcome of the game. The framework is illustrated in a theoretical example. The example shows that costs involved to obtain convergence can differ substantially between countries and that, ultimately, these high costs for some countries will result in non-cooperative behaviour. Furthermore, it is shown that a small deviation from a Pareto optimal solution can increase convergence considerably. An algorithm is devised to obtain solutions of the game which are politically more feasible than the Nash bargaining solution and improve on the non-cooperative solution.
|Keywords||Dynamic games, Convergence, Maastricht Treaty|
|JEL||Economic Integration (jel F15)|
|Persistent URL||dx.doi.org/10.1016/0176-2680(94)00058-R, hdl.handle.net/1765/116019|
|Journal||European Journal of Political Economy|
Douven, R.C.H.M, & Engwerda, J. (1999). Is there room for convergence in the E.C.?. European Journal of Political Economy, 11(1), 113–130. doi:10.1016/0176-2680(94)00058-R