We develop a model in which states may choose to form coalitions to capture efficiency gains from policy coordination. Joining a coalition entails setting the policy variable to maximize the coalitions' aggregate payoff at a Nash equilibrium against nonmembers, and to commit to a transfer scheme...

We develop a model in which states may choose to form coalitions to capture efficiency gains from policy coordination. Joining a coalition entails setting the policy variable to maximize the coalition's aggregate payoff at a Nash equilib- rium against non-members, and to commit to a transfer...