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Uncertainty, Gains from Specialization and the Welfare State

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  • Michele Di Maio

    (Università di Macerata)

Abstract

This paper presents a specific-factor model showing that, under technological uncertainty and risk averse agents, increasing trade integration is not always welfare increasing. The reason is that changes in the country's specialization level induced by trade integration produce both benefits and cost. Increasing specialization increases wages (efficiency gains), but, modifying the tax scheme of the Welfare State, it also increases income variance. The model identifies a trade-off, absent in the standard deterministic model, between gains from specialization and the higher cost of the Welfare State. It is shown that, depending on the parameter's configuration, it exists a specialization level beyond which aggregate expected income under free trade becomes lower than that achieved under autarky. �

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Bibliographic Info

Paper provided by Macerata University, Department of Finance and Economic Sciences in its series Working Papers with number 36-2006.

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Date of creation: Oct 2006
Date of revision: Oct 2008
Handle: RePEc:mcr:wpdief:wpaper00036

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Keywords: Free Trade; Specialization gains; Welfare State; Uncertainty;

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  1. Jonathan Eaton & Gene M. Grossman, 1981. "Tariffs as Insurance: Optimal Commercial Policy When Domestic Markets Are Incomplete," NBER Working Papers 0797, National Bureau of Economic Research, Inc.
  2. Sinn, Hans-Werner, 1995. " A Theory of the Welfare State," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(4), pages 495-526, December.
  3. Andersen, Torben M., 2002. "International Integration, Risk and the Welfare State," IZA Discussion Papers 456, Institute for the Study of Labor (IZA).
  4. Brainard, William C. & Cooper, Richard N., 1968. "Uncertainty and Diversification in International Trade," Food Research Institute Studies, Stanford University, Food Research Institute, issue 03.
  5. Dani Rodrik, 1997. "Trade, Social Insurance, and the Limits to Globalization," NBER Working Papers 5905, National Bureau of Economic Research, Inc.
  6. Giampaolo Arachi & Massimo D'Antoni, 2004. "Redistribution as Social Insurance and Capital Market Integration," International Tax and Public Finance, Springer, vol. 11(4), pages 531-547, 08.
  7. Samuel Bowles & Ugo Pagano, 2003. "Economic Integration, Cultural Standardization and the Politics of Social Insurance," Department of Economics University of Siena 408, Department of Economics, University of Siena.
  8. Anderson, Torben M, 2002. " International Integration, Risk and the Welfare State," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(3), pages 343-64, September.
  9. Perotti, Roberto & Alesina, Alberto, 1997. "The Welfare State and Competitiveness," Scholarly Articles 4553027, Harvard University Department of Economics.
  10. Alberto Alesina & Roberto Perotti, 1994. "The Welfare State and Competitiveness," NBER Working Papers 4810, National Bureau of Economic Research, Inc.
  11. Newbery, David M G & Stiglitz, Joseph E, 1984. "Pareto Inferior Trade," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 1-12, January.
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