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
Pages (from-to)321-340
JournalJournal of International Economics
Issue number2
Publication statusPublished - 2006

Bibliographical note

10.1016/j.jinteco.2005.06.012 Article 0022-1996


  • Circular causation International trade Capital mobility Optimal policy Welfare state


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