Pooling sovereignty under the subsidiary principle ☆ Michele G. Giuranno ⁎ Department of Public Policy and Public Choice (POLIS), University of Eastern Piedmont, Via Cavour 84, 15100 Alessandria, Italy article info abstract Article history: Received 3 January 2009 Received in revised form 18 August 2009 Accepted 21 August 2009 Available online 8 September 2009 This paper investigates the decision whether to centralize public policy in an economy with two levels of government. I show that centralization based on the subsidiarity principle emphasizes rather than resolves a conflict of interest between jurisdictions. The extent of the conflict of interest depends on spillovers and differences in tastes for public spending. Spending decisions are determined by negotiation between local representatives in the centralized legislature. If an agreement cannot be reached, policy is determined non-cooperatively by local governments. Results show that pooling sovereignty by the subsidiarity principle fails to fully internalize spillovers and may lead to a misallocation of public resources. © 2009 Elsevier B.V. All rights reserved. JEL classifications: D78 H0 H40 Keywords: Public goods Centralization Intergovernmental relations Bargaining 1. Introduction The fundamental principle of subsidiarity has largely driven the European discussion about the competencies that should be given to the European Community and those that should be retained for the member states alone. The subsidiarity principle applies to those issues that do not fall within the exclusive competence of the European Union. The principle states that the European Union will be in charge of determining a particular policy if it cannot be sufficiently, or efficiently, determined by the member states at either the national or regional level of government. The principle implies a benefit criterion stating that the European provision of policies must bring added value over and above what could be achieved by individual governments acting alone. This paper develops a decision-making model in which two polities bargain over the delegation of their sovereignty upwards to a centralized intergovernmental institution. The model may be used to study policy formation in both national and international federations as, for instance, the European Union. The aim is to investigate how the implementation of the subsidiarity principle influences the centralized provision of policy. Results show that pooling sovereignty by the subsidiarity principle fails to fully internalize spillovers and may produce misallocation of public resources. The paper focuses on the traditional issue raised by the classical fiscal federalism literature of what level of government should be responsible for taxing and spending. It describes a bargaining context in which independent jurisdictions conduct negotiations in order to allocate power to provide policies to a common supra-jurisdictional legislature. Thus, if member delegates reach agreement, the centralized government implements policy uniformly across jurisdictions and levies a proportional income tax to cover the cost. Conversely, if delegates do not come to agreement, jurisdictional governments are free to provide policy at the European Journal of Political Economy 26 (2010) 125–136 ☆ “Pooling sovereignty means, in practice, that the member states delegate some of their decision-making powers to shared institutions they have created, so that decisions on specific matters of joint interest can be made democratically at European level”.(Europe, n.d.) ⁎ Tel.: +39 0131 283814; fax: +39 0131 283704. E-mail address: michele.giuranno@sp.unipmn.it. 0176-2680/$ – see front matter © 2009 Elsevier B.V. All rights reserved. doi:10.1016/j.ejpoleco.2009.08.004 Contents lists available at ScienceDirect European Journal of Political Economy journal homepage: www.elsevier.com/locate/ejpe