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On The Advantages of Piecemeal Integration

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  • Hansen, Bodil O.

    (Department of Economics, Copenhagen Business School)

  • Keiding, Hans

    (Department of Economics, Copenhagen Business School)

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    Abstract

    For the study of economic integration, it is costumary to use a three countryworld, where two of the countries may introduce forms of closer economic cooperation. In the present model, we follow this tradition but put special emphasis on the role of credit and entrepreneurship. Our model is of the standard neoclassical type, with the addition that production takes time and is subject to uncertainty. Also, firms must use the financial system in order to buy inputs; the cost of credit may differ among countries and industries, reflecting their basic patterns of uncertainty. Following the Newbery-Stiglitz approach, we show that in such model we may exhibit cases of Pareto inferior trade and, in particular, Pareto inferior economic integration. More specifically, we show that integrating countries of very different economic size may give rise to adverse effects on welfare, whereas integration of countries with a more similar economic structure and size tends to have beneficial effects for the parties.

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    File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7495
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    Bibliographic Info

    Paper provided by Copenhagen Business School, Department of Economics in its series Working Papers with number 04-2005.

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    Length: 19 pages
    Date of creation: 01 Feb 2005
    Date of revision:
    Handle: RePEc:hhs:cbsnow:2005_004

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    Postal: Department of Economics, Copenhagen Business School, Solbjerg Plads 3 C, 5. sal, DK-2000 Frederiksberg, Denmark
    Phone: 38 15 25 75
    Fax: 38 15 34 99
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    Web page: http://www.cbs.dk/departments/econ/
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    Related research

    Keywords: trade; uncertainty; Pareto inferior trade; regional integration;

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    References

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    1. Newbery, David M G & Stiglitz, Joseph E, 1984. "Pareto Inferior Trade," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 1-12, January.
    2. Hamid Beladi & Nancy H. Chau, 2000. "Endogenous factor market distortion, risk aversion, and international trade under input uncertainty," Canadian Journal of Economics, Canadian Economics Association, vol. 33(2), pages 523-539, May.
    3. Helpman, Elhanan & Razin, Assaf, 1978. "A theory of international trade under uncertainty," MPRA Paper 22112, University Library of Munich, Germany.
    4. Hoff, Karla, 1994. "A reexamination of the neoclassical trade model under uncertainty," Journal of International Economics, Elsevier, vol. 36(1-2), pages 1-27, February.
    5. Gale, D. & Mas-Colell, A., 1975. "An equilibrium existence theorem for a general model without ordered preferences," Journal of Mathematical Economics, Elsevier, vol. 2(1), pages 9-15, March.
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