Aggregate scale economies, market integration, and optimal welfare state policy

Hassan Molana, Catia Montagna

Research output: Contribution to journalArticle

9 Citations (Scopus)

Abstract

Using a two-sector-two-country model with aggregate scale economies and unionisation, we show that optimal welfare state policy entails positive levels of unemployment benefits under free-trade and capital mobility. In this setting, economic integration does not reduce the revenue raising capacity of governments and thus does not lead to a race-to-the-bottom in social standards. Instead, trade and capital flows interact with welfare state policies in increasing welfare even when each government acts independently (non-cooperatively) in determining its optimal welfare payment. Cooperation is shown to improve upon noncooperative outcomes by raising both the generosity of the welfare state and aggregate welfare.
Original languageEnglish
Pages (from-to)321-340
JournalJournal of International Economics
Volume69
Issue number2
DOIs
Publication statusPublished - 2006

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Scale economies
State policy
Welfare state
Market integration
Government
Unionization
Trade flows
Race to the bottom
Social standards
Capital flows
Payment
Generosity
Economic integration
Revenue
Unemployment benefits
Capital mobility
Free trade
Two-country model

Keywords

  • Circular causation International trade Capital mobility Optimal policy Welfare state

Cite this

Aggregate scale economies, market integration, and optimal welfare state policy. / Molana, Hassan; Montagna, Catia.

In: Journal of International Economics, Vol. 69, No. 2, 2006, p. 321-340.

Research output: Contribution to journalArticle

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