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On the Individual Optimality of Economic Integration

Rui Castro () and Nelnan Koumtingué ()

Cahiers de recherche from Centre interuniversitaire de recherche en économie quantitative, CIREQ

Abstract: Which countries find it optimal to form an economic union? We emphasize the risk-sharing benefits of economic integration. Consider an endowment world economy model, where international financial markets are incomplete and contracts not enforceable. A union solves both frictions among member countries. We uncover conditions on initial incomes and net foreign assets of potential union members such that forming a union is welfare-improving over standing alone in the world economy. Consistently with evidence on economic integration, unions in our model occur (i) relatively infrequently, and (ii) emerge more likely among homogeneous countries, and (iii) rich countries.

Keywords: incomplete markets; endogenous borrowing constraints; risk sharing; economic integration (search for similar items in EconPapers)
JEL-codes: F15 F34 F36 F41 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2014
New Economics Papers: this item is included in nep-dge, nep-ger and nep-opm
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Related works:
Working Paper: On the individual optimality of economic integration (2015) Downloads
Journal Article: On the individual optimality of economic integration (2014) Downloads
Working Paper: On the individual optimality of economic integration (2014) Downloads
Working Paper: On the Individual Optimality of Economic Integration (2011) Downloads
Working Paper: On the Individual Optimality of Economic Integration (2011) Downloads
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