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

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  • Hassan Molana
  • Catia Montagna

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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Suggested Citation

  • Hassan Molana & Catia Montagna, 2004. "Aggregate Scale Economies, Market Integration, and Optimal Welfare State Policy," Dundee Discussion Papers in Economics 172, Economic Studies, University of Dundee.
  • Handle: RePEc:dun:dpaper:172
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    Cited by:

    1. Hassan Molana & Catia Montagna, 2007. "Welfare State, Market Imperfections, and International Trade," Open Economies Review, Springer, vol. 18(1), pages 95-118, February.
    2. 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, June.
    3. 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.
    4. Hassan Molana & Catia Montagna & Chang Yee Kwan, 2012. "Subsidies As Optimal Fiscal Stimuli," Bulletin of Economic Research, Wiley Blackwell, vol. 64(Supplemen), pages 149-167, December.
    5. Molana, Hassan & Montagna, Catia, 2007. "Expansionary effects of the welfare state in a small open economy," The North American Journal of Economics and Finance, Elsevier, vol. 18(3), pages 231-246, December.
    6. 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 of Labor Economics (IZA).
    7. Catia Montagna & Antonella Nocco, 2015. "(De)Unionization, Trade Liberalization and Selection," Metroeconomica, Wiley Blackwell, vol. 66(1), pages 91-122, February.
    8. Susanna Thede, 2018. "A model of trade, task offshoring and social insurance," International Economics and Economic Policy, Springer, vol. 15(4), pages 787-802, October.
    9. Torben Andersen & Allan Sørensen, 2011. "Globalisation squeezes the public sector—is it so obvious?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(4), pages 369-382, August.
    10. Yu-Fu Chen & Hassan Molana & Catia Montagna & Holger Görg & Dennis Görlich & Yama Temouri, 2014. "Globalisation and the Future of the Welfare State. WWWforEurope Working Paper No. 54," WIFO Studies, WIFO, number 47156, June.
    11. Eckhard Janeba, 2009. "Exports, unemployment, and the welfare state," Canadian Journal of Economics, Canadian Economics Association, vol. 42(3), pages 930-955, August.
    12. Friedl, Andreas & Görlich, Dennis & Horn, Sebastian & Krieger-Boden, Christiane & Lücke, Matthias, 2015. "How to deal with inequality: Welfare system challenges and European responses," Kiel Policy Brief 85, Kiel Institute for the World Economy (IfW).

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    More about this item

    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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