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Public Goods in Trade: On the Formation of Markets and Political Jurisdictions

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Author Info
Alessandra Casella
Jonathan S. Feinstein

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Abstract

The current debate in Western Europe centers on the relationship between economic and political integration. To address this problem, we construct a simple general equilibrium model in which the returns to trading are directly affected by the availability of a public good. In our model, heterogeneous agents choose both a club and a market to belong to. In the club, agents vote over the public good, are taxed to finance this good, and receive access to it when they trade. In the market, they are randomly matched with a partner. If a match occurs between traders of different clubs, they both suffer a transactions cost. We show that, in general, the political boundaries established by the clubs can be distinct from market borders, leading to international trade between members of different clubs. Further, as the region develops, markets become wider (eventually leading to a common market) and the desire to avoid transaction costs initially leads to political unification. At still higher levels of development, however, where transaction costs are less important, traders prefer the diversity offered by multiple clubs.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3554.

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Date of creation: Dec 1990
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Handle: RePEc:nbr:nberwo:3554

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  1. LE BRETON, Michel & WEBER, Shlomo, 2003. "The Art of Making Everybody Happy : How to Prevent a Secession," IDEI Working Papers 164, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  2. Alessandra Casella, 1992. "Arbitration in International Trade," NBER Working Papers 4136, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Shlomo Weber & Michel Le Breton, 2001. "The Art of Making Everybody Happy: How to Prevent a Secession," IMF Working Papers 01/176, International Monetary Fund. [Downloadable!]
  4. Alberto Alesina & Enrico Spolaore, 1995. "On the Number and Size of Nations," NBER Working Papers 5050, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Islam, Roumeen, 2004. "What are the right institutions in a globalizing world? and... can we keep them if we have found them?," Policy Research Working Paper Series 3448, The World Bank. [Downloadable!]
  6. Alberto Alesina & Enrico Spolaore, 1996. "International Conflict, Defense Spending and the Size of Countries," NBER Working Papers 5694, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Alberto Alesina & Romain Wacziarg, 1999. "Is Europe Going Too Far?," NBER Working Papers 6883, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Roberto Perotti, 2001. "Is a Uniform Social Policy Better? Fiscal Federalism and Factor Mobility," American Economic Review, American Economic Association, vol. 91(3), pages 596-610, June. [Downloadable!] (restricted)
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