Economic integration reduces the costs of factor mobility, producing efficiency gains and contributing to equalization of net factor returns. This raises the 'cost' of income-redistribution policy, thus threatening a basic function of the welfare state. A simple model of costly factor mobility under uncertainty shows that greater factor mobility enables factor owners to pool industry-specific, region-specific, or occupation-specific risks (due to uncertain technology or terms of trade). Economic integration may, thus, reduce some of the potential social insurance benefits of redistributive policy. Copyright 1995 by The editors of the Scandinavian Journal of Economics.
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