The Design of Supranational Structures: An Economic Perspective

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Abstract
The nature of transnational public goods with international ranges of benefit spillovers is shown to justify, in some instances, the operation of a supranational structure in order to foster allocative efficiency. The design of an “optimal” supranational body is investigated from an economic perspective that weighs both transaction costs and benefits that are derived from the linkage of national entities. In particular, transaction costs in the form of decision-making, interdependency, and enforcement costs must be matched at the margin with transaction benefits in the form of efficiency gains, scale economies, and enlarged communication possibilities if optimal tightness of the link is to be determined. Additionally, the optimality condition for a complex supranational system requiring multiple supranational linkages is depicted. The role of technology with respect to the nature of transnational public goods and the design of supranational formations is briefly analyzed.

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