Discussion paper // Center for Mathematical Studies in Economics and Management Science 1428
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 problem if potential members choose to opt out. The analysis shows that flexible cooperation is better if the heterogeneity is large and the externality small. The best possible symmetric and monotonic participation mechanism, however, is implemented by two thresholds: A mandatory and a minimum participation rule. Rigid and flexible cooperation are both special cases of this mechanism. For each of these thresholds, the optimum is characterized.