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Aggregate Scale Economies, Market Integration, and Optimal Welfare State Policy

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Author Info
Hassan Molana (University of Dundee)
Catia Montagna (University of Dundee)

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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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Paper provided by EconWPA in its series International Trade with number 0510002.

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Date of creation: 05 Oct 2005
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Handle: RePEc:wpa:wuwpit:0510002

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

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Find related papers by JEL classification:
E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
F1 - International Economics - - Trade
F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
J5 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!]
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