Welfare State, Market Imperfections, and International Trade |
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Authors: | Hassan Molana Catia Montagna |
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Institution: | (1) Department of Economic Studies, University of Dundee, 3 Perth Road, Dundee, DD1 4HN, UK |
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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.
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Keywords: | Welfare state Circular causation International trade |
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