Aggregate Scale Economies, Market Integration and Optimal Welfare State Policy

Hassan Molana and Catia Montagna

International Trade from EconWPA

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.

Keywords: circular causation; international trade; capital mobility; optimal policy; welfare state (search for similar items in EconPapers)
JEL-codes: F1 F2 (search for similar items in EconPapers)
Date: Written 2005-09-13
Note: Type of Document - pdf; pages: 25
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http://129.3.20.41/eps/it/papers/0509/0509006.pdf (application/pdf)

Related works:
Working Paper: Aggregate Scale Economies, Market Integration, and Optimal Welfare State Policy (2005)
Journal Article: Aggregate scale economies, market integration, and optimal welfare state policy (2006)
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