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On the Individual Optimality of Economic Integration

  • CASTRO, Rui
  • KOUMTINGUÉ, Nelnan

Which countries find it optimal to form an economic union? We emphasize the risk-sharing benefits of economic integration. We consider an endowment world economy model, where international financial markets are incomplete and contracts not enforceable. A union solves both frictions among member countries. We uncover conditions on initial incomes and net foreign assets of potential union members such that forming a union is welfare-improving over standing alone in the world economy. Consistently with evidence on economic integration, unions in our model occur (i) relatively infrequently, and (ii) emerge more likely among homogeneous countries, and (iii) rich countries.

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File URL: https://papyrus.bib.umontreal.ca/xmlui/handle/1866/4829
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Paper provided by Universite de Montreal, Departement de sciences economiques in its series Cahiers de recherche with number 2011-04.

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Length: 41 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:mtl:montde:2011-04
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