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Aggregate Scale Economies, Market Integration and Optimal Welfare State Policy

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  • Hassan Molana

    (University of Dundee)

  • Catia Montagna

    (University of Dundee & GEP University of Nottingham)

Abstract

Using a two-sector-two-country model with aggregate scale economies and unionisation, we show that optimal welfare state policy entails positive levels of unemployment benefits under free-trade and capital mobility. In this setting, economic integration does not reduce the revenue raising capacity of governments and thus does not lead to a race-to-the- bottom in social standards. Instead, trade and capital flows interact with welfare state policies in increasing welfare even when each government acts independently (non-cooperatively) in determining its optimal welfare payment. Cooperation is shown to improve upon noncooperative outcomes by raising both the generosity of the welfare state and aggregate welfare.

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File URL: http://128.118.178.162/eps/it/papers/0509/0509006.pdf
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Bibliographic Info

Paper provided by EconWPA in its series International Trade with number 0509006.

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Length: 25 pages
Date of creation: 13 Sep 2005
Date of revision:
Handle: RePEc:wpa:wuwpit:0509006

Note: Type of Document - pdf; pages: 25
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Web page: http://128.118.178.162

Related research

Keywords: circular causation; international trade; capital mobility; optimal policy; welfare state;

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Citations

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Cited by:
  1. Chen, Yu-Fu & Görg, Holger & Görlich, Dennis & Molana, Hassan & Montagna, Catia & Temouri, Yama, 2014. "Globalisation and the Future of the Welfare State," IZA Policy Papers 81, Institute for the Study of Labor (IZA).
  2. Torben Andersen & Allan Sørensen, 2011. "Globalisation squeezes the public sector—is it so obvious?," International Tax and Public Finance, Springer, vol. 18(4), pages 369-382, August.
  3. Hassan Molana & Catia Montagna, 2005. " Expansionary Effects of the Welfare State in a Small Open Economy," CDMA Conference Paper Series 0505, Centre for Dynamic Macroeconomic Analysis.
  4. Görg, Holger & Molana, Hassan & Montagna, Catia, 2009. "Foreign direct investment, tax competition and social expenditure," International Review of Economics & Finance, Elsevier, vol. 18(1), pages 31-37, January.
  5. Hassan Molana & Catia Montagna, 2007. "Welfare State, Market Imperfections, and International Trade," Open Economies Review, Springer, vol. 18(1), pages 95-118, February.
  6. Torben M. Andersen & Allan Sørensen, 2012. "Globalization, Tax Distortions, and Public-Sector Retrenchment," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(2), pages 409-439, 06.
  7. Yu-Fu Chen & Holger Görg & Dennis Görlich & Hassan Molana & Catia Montagna & Yama Temouri, 2014. "Globalisation and the future of the welfare state," WWWforEurope Working Papers series 54, WWWforEurope.

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