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On the Individual Optimality of Economic Integration

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  • CASTRO, Rui
  • KOUMTINGUÉ, Nelnan

Abstract

Which countries find it optimal to form an economic union? We emphasize the risk-sharing benefits of economic integration. We consider an endowment world economy model, where international financial markets are incomplete and contracts not enforceable. A union solves both frictions among member countries. We uncover conditions on initial incomes and net foreign assets of potential union members such that forming a union is welfare-improving over standing alone in the world economy. Consistently with evidence on economic integration, unions in our model occur (i) relatively infrequently, and (ii) emerge more likely among homogeneous countries, and (iii) rich countries.

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Bibliographic Info

Paper provided by Centre interuniversitaire de recherche en économie quantitative, CIREQ in its series Cahiers de recherche with number 05-2011.

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Length: 41 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:mtl:montec:05-2011

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Keywords: Incomplete markets; endogenous borrowing constraints; risk sharing; economic integration;

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