Interregional Negotiations and Strategic Delegation Under Government Subsidy Schemes

Abstract

We examine whether the strategic delegation problem in interregional negotiations can be solved by a governmental policy. It is well known that when an interregional negotiation is delegated to representatives, each region elects its representative strategically, resulting in inefficient negotiation outcomes. Here, we focus on a cost-matching grant, which is frequently used as a subsidy policy in the real world. Our results show that there is not necessarily an optimal cost-matching grant that can restore the efficiency of negotiation outcomes, because the introduction of the grant generates a new kind of manipulation of negotiation-breakdown outcomes. Thus, we present an institutional procedure in which a new representative is elected after a negotiation breaks down, which negates this new manipulability. In this case, there is an optimal cost-matching grant that achieves an efficient allocation through negotiation.

Keywords: Strategic delegation; Median voter theorem; Cost-matching grant; Lindahl price; Nash bargaining

JEL Classification: D62, D72, H41, H77