Endogenous Creation and Dissolution of Economic and Monetary Unions: An Experimental Investigation
Third-party funded project
Project title Endogenous Creation and Dissolution of Economic and Monetary Unions: An Experimental Investigation
Principal Investigator(s) Weder, Rolf
Project Members Hohl, Lukas
Organisation / Research unit Departement Wirtschaftswissenschaften / Aussenwirtschaft und Europ. Integration (Weder),
Europainstitut / Europäische Wirtschaft (Weder)
Project start 01.05.2017
Probable end 30.04.2020
Status Completed

After a period of enlargement and strengthening of political and economic integration, European countries are experiencing difficulties in sustaining cooperation in the long-run. The European Union (EU) faces considerable centrifugal forces following discussions about a Greek exit from the European Monetary Union (EMU) in the Summer 2015 and, after the vote to exit the EU in the Summer 2016, the submitted letter of resignment of Britain in Spring 2017. Two questions naturally arise. What determines the stability of economic and monetary unions, such as for example the E(M)U? And what institutions can facilitate cohesion as well as long-run cooperation in heterogeneous groups?This proposed scientific project studies long-run cooperation in heterogeneous groups, using laboratory experiments. The focus is on the endogenous formation and dissolution of groups by means of either voluntary exit or group exclusion, when players interact as strangers over an indefinite horizon. The experiment can provide valuable intuition on the dynamics of creation, stability and dissolution of economic unions.From an international economics perspective, individuals have different incentives to become part of, remain in or leave some form of economic or political union, depending on the circumstances of the country in which they are living. From the trade literature, for example, we know that the gains from trade tend to be larger for individuals in a small country compared to those living in a large country, due to the larger change in relative prices of goods and services. From the literature on monetary integration, we would, for example, expect individuals in countries with “bad” monetary policies to be more interested in a monetary union than those living in a country with “good” monetary policies.Economic theory may provide us with a good understanding of how rational individuals in different countries will support economic unions within well defined, solid institutions. As emphasized by Buchanan and Brennan (1985, p.1), “the rules that coordinate the actions of individuals are important.” As these rules are, however, endogenous and may be weak or even unobservable in reality, experiments represent a useful methodological approach to study endogenous creation and dissolution of economic and monetary unions. The project will collect data on individual behavior under different circumstances. In this manner, the project aims to identify causal links between underlying institutional and economic factors and outcomes in terms of the creation, stability and dissolution of prototypical economic unions.This research will contribute to multiple fields, from experimental to monetary economics, from international economics to the study of cooperation, pushing forward the idea of using laboratory experimentation to investigate real-world issues in trade and in international economics (Noussair et al., 1995, 1997).

Financed by Swiss National Science Foundation (SNSF)

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