Welfare state, market imperfections and international trade

Hassan Molana, Catia Montagna

    Research output: Contribution to journalArticle

    Abstract

    Within a two-sector-two-country model of trade with aggregate scale economies and unionisation, a more generous welfare state in one country increases welfare in that country and can have positive spillover effects on the other. Furthermore, synchronised expansions of social security are more welfare enhancing than unilateral ones. Our results counter the fears that a race to the bottom in social standards may result from the ‘shrinking-tax-base’ entailed by international capital mobility. While affecting trade patterns and income distribution, capital mobility interacts with welfare state policies in increasing welfare, even when capital flows out of the country that initiates the shock.
    Original languageEnglish
    Pages (from-to)95
    Number of pages118
    JournalOpen Economies Review
    Volume18
    Issue number1
    DOIs
    Publication statusPublished - 2007

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    Keywords

    • Welfare state
    • Circular causation
    • International trade

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