Customs union and technical efficiency

Summary Customs unions are frequently suggested to have a salutary effect upon the efficiency of production. However, this is not part of received customs union theory. It is shown that the essence of the competitive ‘cold shower’ is very difficult to accommodate in standard theory, given its underlying theory of intrafirm behaviour, the assumed nature of competitive firm behaviour and the static framework. Neither can it be satisfactorily worked into X-inefficiency theory. A Schumpeterian view of competitive firm behaviour can explain how the customs union will be perceived by certain firms as an opportunity, causing them to intensify experiments and search for new forms of production, attempt new intrafirm decison rules and change market behaviour. This paper was written while still at the European University Institute, Florence.