Harmonization and Side Payments in Political Cooperation∗

I study two regions that are negotiating an agreement to internalize externalities. Local preferences are local information, but reluctance is, in equilibrium, signaled by delay. Conditions are derived for when it is efficient to restrict the attention to policies that are uniform across regions with and without side payments and when it is efficient to prohibit side payments in the negotiations. While policy differentiation and side payments allow the policy to reflect local conditions, they create conflicts between the regions and thus, delay. If political centralization implies uniformity, as frequently assumed in the federalism literature, the results describe when centralization outperforms decentralized cooperation. But the results also provide a theoretical foundation for this uniformity assumption, and characterize when it is likely to hold.