@article{7396a6c353f543d39f3d184da0c4532f,
title = "Aggregate scale economies, market integration, and optimal welfare state policy",
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.",
keywords = "Circular causation, International trade, Capital mobility, Optimal policy, Welfare state",
author = "Hassan Molana and Catia Montagna",
note = "dc.description.sponsorship: British Academy Research Grant SG-32914 ",
year = "2006",
month = jul,
doi = "10.1016/j.jinteco.2005.06.012",
language = "English",
volume = "69",
journal = "Journal of International Economics",
issn = "0022-1996",
publisher = "Elsevier",
number = "2",
}