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Who is Against a Common Market?

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Author Info
Giovanni Facchini (University of Milan, University of Essex, LdA, CEPR and CES-Ifo)
Cecilia Testa (University of London and STICERD - LSE)

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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 non-discriminatory policies towards international factor flows, as to maximize the domestic median voter\'s welfare. Each of the two countries simultaneously holds then a referendum on a Common Market initiative leading to the removal of the pre-existing policies for factor flows occurring between the member countries, while no coordination is imposed on policies vis-µa-vis the rest of the world. Several interesting results emerge. In a common market, factors moving between the members are more likely to gain, the bigger is the import demand of one country as compared to the factor supply of the exporting partner. Factors which instead do not relocate are more likely to see their return decrease when flows are big 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 political feasibility of the integration process.

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Publisher Info
Paper provided by Centro Studi Luca d\'Agliano, University of Milano in its series Development Working Papers with number 240.

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Date of creation: 07 Jan 2008
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Handle: RePEc:csl:devewp:240

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Related research
Keywords: Economic Integration; Factor Mobility; Political Economy;

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Find related papers by JEL classification:
F1 - International Economics - - Trade
F2 - International Economics - - International Factor Movements and International Business
P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Facchini, Giovanni & Willmann, Gerald, 2005. "The political economy of international factor mobility," Journal of International Economics, Elsevier, vol. 67(1), pages 201-219, September. [Downloadable!] (restricted)
  2. Alberto Alesina & Ignazio Angeloni & Federico Etro, 2001. "Institutional Rules for Federations," NBER Working Papers 8646, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Scholten, Ulrich & Thum, Marcel, 1996. " Public Pensions and Immigration Policy in a Democracy," Public Choice, Springer, vol. 87(3-4), pages 347-61, June.
  4. Ortega, Francesc, 2005. "Immigration quotas and skill upgrading," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1841-1863, September. [Downloadable!] (restricted)
  5. Daniel Brou & Michele Ruta, 2006. "Special Interests And The Gains From Political Integration," Economics and Politics, Blackwell Publishing, vol. 18(2), pages 191-218, 07. [Downloadable!] (restricted)
  6. Richardson, Martin, 1993. "Endogenous protection and trade diversion," Journal of International Economics, Elsevier, vol. 34(3-4), pages 309-324, May. [Downloadable!] (restricted)
  7. Razin, Assaf & Sadka, Efraim, 1999. "Migration and pension with international capital mobility," Journal of Public Economics, Elsevier, vol. 74(1), pages 141-150, October. [Downloadable!] (restricted)
  8. 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. [Downloadable!] (restricted)
  9. 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. [Downloadable!]
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  10. 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. [Downloadable!] (restricted)
  11. 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. [Downloadable!] (restricted)
  12. 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. [Downloadable!] (restricted)
  13. 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. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Facchini, Giovanni & Mayda, Anna Maria & Mishra, Prachi, 2008. "Do Interest Groups Affect US Immigration Policy?," CEPR Discussion Papers 6898, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Giovanni Facchini & Peri A. Silva & Gerald Willmann, 2008. "The Customs Union Issue: Why do we Observe so few of them?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  3. Giovanni Facchini & Anna Maria Mayda & Prachi Mishra, 2007. "Do Interest Groups Affect Immigration?," IZA Discussion Papers 3183, Institute for the Study of Labor (IZA). [Downloadable!]
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