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Aggregate scale economies, market integration, and optimal welfare state policy

  • Molana, Hassan
  • Montagna, Catia

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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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 69 (2006)
Issue (Month): 2 (July)
Pages: 321-340

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Handle: RePEc:eee:inecon:v:69:y:2006:i:2:p:321-340
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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