Specific investments and the EU enlargement

This paper analyzes a hold-up problem in the EU enlargement process. EU-specific anticipatory investments of private firms lower the governmentʹs outside option. The EU takes advantage of the applicantsʹ increased dependency and extracts more surplus through entrance conditions that benefit it and impose net costs on applicants. If private firms pay less than the full entrance fee in taxes, enlargement immiserizes the entrant. While in practice an applicant may possess sufficient bargaining power to avoid immiserization, the hold-up problem reduces its potential gains from joining the EU. This result suggests that previous calculations, ignoring both the applicantsʹ costs of joining the EU and the dynamics of their bargaining position during the negotiations, overestimate the welfare effects of membership.