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On The Advantages of Piecemeal Integration

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Author Info
Hansen, Bodil O. (Department of Economics, Copenhagen Business School)
Keiding, Hans (Department of Economics, Copenhagen Business School)
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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Publisher 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

Contact details of provider:
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 26 65
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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;

Find related papers by JEL classification:
F11 - International Economics - - Trade - - - Neoclassical Models of Trade
F15 - International Economics - - Trade - - - Economic Integration
F34 - International Economics - - International Finance - - - International Lending and Debt Problems

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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  1. 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. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  3. Newbery, David M G & Stiglitz, Joseph E, 1984. "Pareto Inferior Trade," Review of Economic Studies, Blackwell Publishing, vol. 51(1), pages 1-12, January. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
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