The Zollverein and the Formation of a Customs Union

The Zollverein, the German customs union of 1834, was the institutional centrepiece of Germany's economic unification.  A bargaining model is applied to analyze the structure of its negotiation process and accession sequence.  The existence of negative coalition externalities, the effect of a coalition of non-participants, led Prusssia to choose sequential over multilateral negotiations.  The nature of these externalities within the areas of financial revenues, trade policy and domestic political economy also explains the observed accession sequence.  The choice of a customs union as institutional structure allowed Prussia to extract higher concessions from other states due to stronger coalition externalities.