Integration of Asymmetric Nations

We examine the incentives for integration between two nations of different sizes in a set-up similar to that used by: individuals are indexed by location, each nation (comprising of individuals) is an interval, and the public good in each nation is provided from its capital located in the middle of the nation. We analyse integration where each country gives up its sovereignty and there is a joint decision about the location of the new nation's capital. We find that integration occurs if the size differences are below a certain threshold. After integration, a new capital is built (in the most efficient location) if the costs of relocating the capital are not too high. The results are robust in a number of plausible decision-making scenarios. Either country can be the major beneficiary of integration, depending on transport and capital maintenance costs.