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

  • Hassan Molana

    (University of Dundee)

  • Catia Montagna

    (University of Dundee)

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/0510/0510002.pdf
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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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  20. Dani Rodrik, 1997. "Has Globalization Gone Too Far?," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 57.
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