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Aggregate Scale Economies, Market Integration and Optimal Welfare State Policy

  • Hassan Molana

    (University of Dundee)

  • Catia Montagna

    (University of Dundee & GEP University of Nottingham)

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://econwpa.repec.org/eps/it/papers/0509/0509006.pdf
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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
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Bretschger, Lucas & Hettich, Frank, 2000. "Globalisation, capital mobility and tax competition: Theory and evidence for OECD countries," Wirtschaftswissenschaftliche Diskussionspapiere 07/2000, Ernst Moritz Arndt University of Greifswald, Faculty of Law and Economics.
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  13. Perotti, Roberto & Alesina, Alberto, 1997. "The Welfare State and Competitiveness," Scholarly Articles 4553027, Harvard University Department of Economics.
  14. Paul De Grauwe & Magdalena Polan, 2003. "Globalisation and Social Spending," CESifo Working Paper Series 885, CESifo Group Munich.
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  18. Bartelsman, Eric J & Caballero, Ricardo J & Lyons, Richard K, 1994. "Customer- and Supplier-Driven Externalities," American Economic Review, American Economic Association, vol. 84(4), pages 1075-84, September.
  19. Startz, Richard, 1989. "Monopolistic Competition as a Foundation for Keynesian Macroeconomic Models," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 737-52, November.
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