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Who Is Against a Common Market?

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  • Giovanni Facchini
  • Cecilia Testa

Abstract

This paper develops a theory of the endogenous formation of a common market in a three-country, two-factor political economy model. In the status quo, Home and Foreign implement nondiscriminatory policies toward international factor flows in order to maximize the domestic median voter's welfare. Then the two countries simultaneously hold referenda on a common market initiative, leading to the removal of the pre-existing policies for factor flows between the member countries, while no coordination is imposed on policies vis-à-vis the Rest of the World. Several interesting results emerge. In a common market, the returns on factors moving between the members are more likely to increase the larger is the import demand of one country relative to the factor supply of the exporting partner. Factors that do not relocate are more likely to see their returns decrease when flows are large and import demands are inelastic. Importantly, for the common market to emerge as an equilibrium, some factors must continue to experience enhanced protection when the integration process is completed. This result highlights the potential tension between social desirability and the political feasibility of the integration process. (JEL: F1, F2, P16) (c) 2009 by the European Economic Association.

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Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 7 (2009)
Issue (Month): 5 (09)
Pages: 1068-1100

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Handle: RePEc:tpr:jeurec:v:7:y:2009:i:5:p:1068-1100

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  1. Alberto Alesina & Ignazio Angeloni & Federico Etro, 2001. "Institutional Rules for Federations," NBER Working Papers 8646, National Bureau of Economic Research, Inc.
  2. Anna Maria Mayda (Georgetown University), 2005. "Who Is Against Immigration? A Cross-Country Investigation of Individual Attitudes towards Immigrants," Working Papers gueconwpa~05-05-10, Georgetown University, Department of Economics.
  3. Facchini, Giovanni & Willmann, Gerald, 2005. "The political economy of international factor mobility," Journal of International Economics, Elsevier, vol. 67(1), pages 201-219, September.
  4. Bertocchi, Graziella & Strozzi, Chiara, 2004. "Citizenship laws and international migration in historical perspective," Discussion Papers, Research Unit: Market Processes and Governance SP II 2004-18, Social Science Research Center Berlin (WZB).
  5. Bolton, Patrick & Roland, Gerard, 1996. "Distributional Conflicts, Factor Mobility, and Political Integration," American Economic Review, American Economic Association, vol. 86(2), pages 99-104, May.
  6. Ashley S. Timmer & Jeffrey G. Williamson, 1996. "Racism, Xenophobia or Markets? The Political Economy of Immigration Policy Prior to the Thirties," NBER Working Papers 5867, National Bureau of Economic Research, Inc.
  7. Giovanni Facchini & Oliver Lorz & Gerald Willmann, 2005. "Asylum Seekers in Europe: The Warm Glow of a Hot Potato," Development Working Papers 205, Centro Studi Luca d\'Agliano, University of Milano.
  8. Daniel Brou & Michele Ruta, 2006. "Special Interests And The Gains From Political Integration," Economics and Politics, Wiley Blackwell, vol. 18(2), pages 191-218, 07.
  9. Alberto Alesina & Ignazio Angeloni & Federico Etro, 2003. "International Unions," Harvard Institute of Economic Research Working Papers 2001, Harvard - Institute of Economic Research.
  10. Ortega, Francesc, 2005. "Immigration quotas and skill upgrading," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1841-1863, September.
  11. Kemp, Murray C. & Wan, Henry Jr., 1976. "An elementary proposition concerning the formation of customs unions," Journal of International Economics, Elsevier, vol. 6(1), pages 95-97, February.
  12. Levy, Philip I, 1997. "A Political-Economic Analysis of Free-Trade Agreements," American Economic Review, American Economic Association, vol. 87(4), pages 506-19, September.
  13. Grinols, Earl L., 1981. "An extension of the Kemp-Wan theorem on the formation of customs unions," Journal of International Economics, Elsevier, vol. 11(2), pages 259-266, May.
  14. Richardson, Martin, 1993. "Endogenous protection and trade diversion," Journal of International Economics, Elsevier, vol. 34(3-4), pages 309-324, May.
  15. Razin, Assaf & Sadka, Efraim, 1999. "Migration and pension with international capital mobility," Journal of Public Economics, Elsevier, vol. 74(1), pages 141-150, October.
  16. Scholten, Ulrich & Thum, Marcel, 1996. " Public Pensions and Immigration Policy in a Democracy," Public Choice, Springer, vol. 87(3-4), pages 347-61, June.
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Cited by:
  1. Giovanni Facchini & Peri A. Silva & Gerald Willmann, 2008. "The Customs Union Issue: Why do we Observe so few of them?," CESifo Working Paper Series 2426, CESifo Group Munich.
  2. Giovanni Facchini & Anna Maria Mayda & Prachi Mishra, 2009. "Do Interest Groups affect US Immigration Policy?," CReAM Discussion Paper Series 0904, Centre for Research and Analysis of Migration (CReAM), Department of Economics, University College London.
  3. Facchini, Giovanni & Mayda, Anna Maria & Mishra, Prachi, 2007. "Do Interest Groups Affect Immigration?," IZA Discussion Papers 3183, Institute for the Study of Labor (IZA).
  4. Bougheas, Spiros & Nelson, Doug, 2013. "On the political economy of high skilled migration and international trade," European Economic Review, Elsevier, vol. 63(C), pages 206-224.
  5. Giovanni Facchini & Anna Maria Mayda, 2009. "The Political Economy of Immigration Policy," Human Development Research Papers (2009 to present) HDRP-2009-03, Human Development Report Office (HDRO), United Nations Development Programme (UNDP), revised Apr 2009.
  6. Picard, Pierre M. & Worrall, Tim, 2014. "Is a Policy of Free Movement of Workers Sustainable?," IZA Discussion Papers 8035, Institute for the Study of Labor (IZA).

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