Aggregate scale economies, market integration, and optimal welfare state policy [An article from: Journal of International Economics]

This digital document is a journal article from Journal of International Economics, published by Elsevier in 2006. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

Description:
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 non-cooperative outcomes by raising both the generosity of the welfare state and aggregate welfare.