Abstract In the search for an optimal institutional design in the European Union, efficiency criteria for the allocation of prerogatives to different levels of government are greatly needed. The goal of this article is to provide a comprehensive framework for the optimal allocation of prerogatives by stressing the role of economic convergence in allowing for efficient centralization of policies. Harmonization of policies can be harmful when local economies are diverging too much. However, citizens or governments may agree through deliberation on the appropriateness of making their economies converge in order to be able to implement an efficient common policy that internalizes externalities.