International Unions and Integration

We consider a model of international unions where countries have heterogeneous preferences for integration and their integration decisions are strategic complements. We analyze equilibrium integration under different integration protocols and characterize the preferences of countries over enlargement and the flexibility of integration protocols. When non-member countries can partially integrate with the union, restrictions on non-member integration are an important determinant of the size and the scope of the union and are necessary for a union to be effective. When countries can exit the union following a preference shock, restrictions on the integration of former members determine the robustness of the union. Our results can explain the evolution of the EU, where enlargement and flexible integration are spearheaded by the "core" countries and shed light on the relationship of the EU with non-member countries