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

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  • Molana, Hassan
  • Montagna, Catia

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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 69 (2006)
Issue (Month): 2 (July)
Pages: 321-340

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Handle: RePEc:eee:inecon:v:69:y:2006:i:2:p:321-340

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Web page: http://www.elsevier.com/locate/inca/505552

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Cited by:
  1. Chen, Yu-Fu & Görg, Holger & Görlich, Dennis & Molana, Hassan & Montagna, Catia & Temouri, Yama, 2014. "Globalisation and the future of the welfare state," Kiel Policy Brief 76, Kiel Institute for the World Economy (IfW).
  2. Görg, Holger & Molana, Hassan & Montagna, Catia, 2009. "Foreign direct investment, tax competition and social expenditure," International Review of Economics & Finance, Elsevier, vol. 18(1), pages 31-37, January.
  3. Torben M. Andersen & Allan Sørensen, 2008. "Globalisation squeezes the public sector - is it so obvious?," Economics Working Papers 2008-08, School of Economics and Management, University of Aarhus.
  4. Hassan Molana & Catia Montagna, 2007. "Welfare State, Market Imperfections, and International Trade," Open Economies Review, Springer, vol. 18(1), pages 95-118, February.
  5. Torben M. Andersen & Allan Sørensen, 2012. "Globalization, Tax Distortions, and Public-Sector Retrenchment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(2), pages 409-439, 06.
  6. Molana, Hassan & Montagna, Catia, 2007. "Expansionary effects of the welfare state in a small open economy," The North American Journal of Economics and Finance, Elsevier, vol. 18(3), pages 231-246, December.

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