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Aggregate Scale Economies, Market Integration, and Optimal Welfare State Policy

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  • Hassan Molana
  • Catia Montagna

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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Paper provided by Economic Studies, University of Dundee in its series Dundee Discussion Papers in Economics with number 172.

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Date of creation: Sep 2004
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Handle: RePEc:dun:dpaper:172

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  8. Baldwin, Richard & Krugman, Paul, 2000. "Agglomeration, Integration and Tax Harmonization," CEPR Discussion Papers 2630, C.E.P.R. Discussion Papers.
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  18. Alesina, Alberto & Perotti, Roberto, 1997. "The Welfare State and Competitiveness," American Economic Review, American Economic Association, vol. 87(5), pages 921-39, December.
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Cited by:
  1. Torben M. Andersen & Allan Sørensen, 2010. "Globalization, tax distortions and public sector retrenchment," Economics Working Papers, School of Economics and Management, University of Aarhus 2010-09, School of Economics and Management, University of Aarhus.
  2. 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.
  3. Holger Görg & Hassan Molana & Catia Montagna, 2007. "Foreign Direct Investment, Tax Competition and Social Expenditure," Dundee Discussion Papers in Economics, Economic Studies, University of Dundee 198, Economic Studies, University of Dundee.
  4. Torben M. Andersen & Allan Sørensen, 2008. "Globalisation squeezes the public sector - is it so obvious?," Economics Working Papers, School of Economics and Management, University of Aarhus 2008-08, School of Economics and Management, University of Aarhus.
  5. 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).
  6. Hassan Molana & Catia Montagna, 2007. "Welfare State, Market Imperfections, and International Trade," Open Economies Review, Springer, Springer, vol. 18(1), pages 95-118, February.

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