For a club such as the European Union, an important question is when, and under which conditions, a subset of the members should be allowed to form "inner clubs" and enhance cooperation. Flexible cooperation allows members to participate if and only if they benefit, but it generates a freerider...

We study the choice of club membership, when member-countries national governments set their tax policies non-cooperatively. Federal policy (in the form of club membership) has a higher constitutional status than national policies (in the form of income tax rates). This allows federal policy to...