Deciding about (de-)centralization of industrial policy: Delegation by a central authority vs. bargaining of regional governments

In the European Union the commission has the primary right to decide about industrial policy. Note that this includes the possibility to allow actions of member countries as long as these are not in conflict with the interest of the EU. This paper deals with the question whether such an assignment of decision rights is appropriate by comparing it with a more decentral system where the decision power is in the hands of the member countries which, however, may agree to delegate this power on a case by case basis to a central authority. The analysis is performed in an integrated Cournot duopoly with domestic and third country consumption. Here it depends on the export ratio and the degree of uncertainty whether industrial policy is better performed by a central authority that internalizes spillovers or by regional governments with superior information about the costs of the regional firm. To analyze how the initial allocation of decision rights affects the actual assignment of power for a specific industry we compare two situations: (i) An uninformed central authority decides about delegation to regional governments. (ii) Asymmetrically informed regional governments bargain about empowering a central authority. Interestingly delegation outperforms bargaining on average in a setting with side payments but without information transfer. If, however, signals obtained in the bargaining stage are used to update the own information, bargaining without side payments delivers in expectation a better result than delegation.