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

Hassan Molana, Catia Montagna

    Research output: Contribution to journalArticlepeer-review

    11 Citations (Scopus)


    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
    JournalJournal of International Economics
    Issue number2
    Early online date26 Sept 2005
    Publication statusPublished - Jul 2006


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


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