DELEGATION GAMES IN CUSTOMS UNIONS

We study a model in which a customs union trades with countries which behave strategically. Provided that the members of the customs union are similar but not identical, we show that both in the case in which intra-union transfers are allowed as well as in the one in which they are not, one country may want to delegate authority for making union policy to its partner. The delegation decision depends on whether the policies used by union and non-union countries are strategic substitutes or complements, and on which union member is more “aggressive”. © 1991 The Review of Economic Studies Limited.