Research Output per year
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.
- Circular causation
- International trade
- Capital mobility
- Optimal policy
- Welfare state
Molana, H. & Montagna, C., 2004, University of Dundee, (Dundee Discussion Papers in Economics; no. 172).
Research output: Working paper › Discussion paper