Aggregate scale economies, market integration, and optimal welfare state policy

Hassan Molana, Catia Montagna

    Research output: Working paperDiscussion paper

    198 Downloads (Pure)

    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.
    Original languageEnglish
    PublisherUniversity of Dundee
    Publication statusPublished - 2004

    Publication series

    NameDundee Discussion Papers in Economics
    PublisherUniversity of Dundee
    No.172
    ISSN (Print)1473-236X

    Keywords

    • Circular causation
    • International trade
    • Capital mobility
    • Optimal policy
    • Welfare state

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  • Research Output

    Aggregate scale economies, market integration, and optimal welfare state policy

    Molana, H. & Montagna, C., Jul 2006, In : Journal of International Economics. 69, 2

    Research output: Contribution to journalArticle

  • 9 Citations (Scopus)

    Cite this

    Molana, H., & Montagna, C. (2004). Aggregate scale economies, market integration, and optimal welfare state policy. (Dundee Discussion Papers in Economics; No. 172). University of Dundee.